Self-managed Superannuation Fund Research Articles

An Analysis of ASIC Enforcement Against Auditors and Liquidators

The Australian Securities and Investments Commission (ASIC) has emphasised the importance of its enforcement role in relation to auditors and liquidators. However, there is little detailed analysis of what enforcement action ASIC has undertaken against auditors and liquidators. Using several sources (ASIC enforcement reports, ASIC media releases, ASIC regulation of registered liquidator reports, and reports of the Companies Auditors Disciplinary Board and its predecessor), the authors analyse ASIC enforcement outcomes against auditors and liquidators between July 2011 and December 2019. The findings include (1) a particularly strong emphasis by ASIC on negotiated enforcement outcomes and administrative remedies rather than court based outcomes; (2) within these negotiated outcomes, a strategy to employ undertakings regarding professional education and independent review of the auditor’s or liquidator’s practice with the objective of improving the practice; (3) a particular enforcement focus on self-managed superannuation fund auditors; and (4) very limited use by ASIC of the Companies Auditors Disciplinary Board.

Experiences of current and former members of self-managed superannuation funds

We surveyed 854 current and 147 former members of self-managed superannuation funds (SMSFs) in 2016. The results of our survey document their aspirations, operational practices and experiences. Both current and former members expressed high general interest in superannuation, but ‘detractors’ of SMSFs outnumbered ‘promoters’. SMSF members said they enjoy ‘control’ of investment, but a majority delegated tasks to financial professionals. Three times as many members rated the performance of their fund as above the SMSF average as below, although most did not measure the performance of their fund adequately. The probability of closing a SMSF is significantly higher if members use net returns, rather than other indicators such as account balance, to judge performance. JEL Classification: H55, H75, J32

Who starts a self-managed superannuation fund and why?

Self-managed superannuation funds (SMSFs) – small retirement savings funds with four or fewer members – now manage almost one-third of retirement savings in Australia, and serve over 1 million members. The number of SMSFs has increased to more than half a million in two decades, yet little is known about the reasons people start the funds and how they operate. We use a survey of more than 500 SMSF members and 500 large superannuation fund members to analyse why SMSF members commence and manage their own fund, compared to similar people who stay with a large fund. We find that control over investments and tax minimisation are the most common reasons for starting a SMSF, while satisfaction with large funds and unwillingness to take on the administrative burden of self-management are the most common reasons for not doing so. SMSF members do not show any greater financial skills than non-members, but they do display overconfidence, a higher risk tolerance and a more trusting attitude to financial professionals. Model results show that the majority of SMSF members start their funds at the suggestion of financial professionals. We also show that those who say they are thinking about starting a SMSF are different in significant ways from the eventual SMSF members, further evidence of the influence of the advice industry.

Self-Managed Super Funds - the Tax Office Perspective

Ensuring effective management of money invested in self-managed superannuation funds and safeguarding these assets for the future is a critical issue for the community. The Australian Taxation Office (ATO) has a role in ensuring Self Managed Superannuation Funds (SMSFs) comply with the Superannuation Industry Supervision (SIS) Act and regulations. Our focus is on whether fund investments are in accordance with trustees' stated investment strategies and in accordance with the SIS Act, but it is not our role to look at the overall soundness of the investments from a business perspective.

Self-Managed Superannuation Funds and the Global Recession: An ATO Perspective

Retirement income is important to the wellbeing of Australia's aging population. Unfortunately, the unfolding global recession is cascading through the superannuation sector.

Superannuation and Bankruptcy: Is there a Mid-Life Crisis Looming?

Research suggests that Australian bankrupts are increasingly older, have professional backgrounds and generally enjoy higher levels of income than has previously been the case. Significantly, available data also indicates that the numbers of persons entering into bankruptcy hold greater levels of real property, and associated mortgage debt, than in previous decades. Given these trends, the importance of protecting superannuation funds becomes paramount to a bankrupt. However, this paper argues that there is a need to balance the protected asset status of superannuation funds with other objectives, such as achieving a fair distribution of the bankrupt’s assets among creditors. This paper examines the extent to which this balance is achieved, particularly in the context of self-managed superannuation funds.

Can Stakeholders be Satisfied with Accountants’ Education to Act as Advisors to Self-Managed Superannuation Funds

ABSTRACT This article investigates to what extent accountants are taught about self-managed superannuation funds (SMSF) in their Australian undergraduate accounting degrees and subsequent professional education programs. The article reports a survey of 138 academics teaching into Australian undergraduate accounting degrees. The results indicate that during their undergraduate accounting degrees, students are likely to be taught little about SMSFs. In a curriculum audit of their subsequent professional studies through professional bodies there is also minimal coverage of SMSFs. The evidence presented in this paper supports reforms to increase the educational requirements for accountants to give specialist advice in this area.

Who Starts a Self-Managed Superannuation Fund and Why?

Self-managed superannuation funds (SMSFs) – small retirement savings funds with four or fewer members – now manage almost one third of retirement savings in Australia, and serve over one million members. The number of SMSFs has increased to more than half a million in two decades. Yet little is known about the reasons people start the funds and how they are operated. We combine survey responses of more than 500 SMSF members and 500 large superannuation fund members to understand the motivation of SMSF members and how they compare with similar people who stay with a large fund. Control over investments and tax minimisation are the most common reasons for starting a fund. Satisfaction with large funds and unwillingness to take on the administrative burden of self-management are the most common reasons for not doing so. SMSF members do not show more financial skill than non-members, but they do express a higher risk tolerance and a more trusting attitude to financial professionals. We present evidence that the majority of SMSF members start their funds at the suggestion of financial professionals. We also show that the types of people who say they are thinking about starting a SMSF are different in significant ways from the types of people who end up as SMSF members, further evidence for the influence of the advice industry.

Experiences of Current and Former Members of Self-Managed Superannuation Funds

The number of self-managed superannuation funds (SMSFs) has grown at more than 5% p.a. over the past five years. The net growth rate consists of 7% new SMSFs and 2% closures. More than 570,000 SMSFs now serve over one million members but little is known about the experiences of members. We survey 854 current and 147 former members to find out how they operate their funds and how they rate the experience. Participation in a self-managed fund is associated with high levels of general interest in superannuation, continuing even after a fund is wound up. However the number of “detractors” of SMSFs exceeds the number of “promoters”, among both current and former members. SMSF members say they enjoy “control” but the majority delegate or share most investment and operational tasks with financial professionals. Many express frustration with administrative and compliance responsibilities. Few SMSF members benchmark their fund’s performance but three times as many rate the performance of their fund as above average, compared with other SMSFs, than below average. The probability of closing a SMSF is significantly higher if members use net returns to judge performance rather than other indicators such as account balance or asset allocation.

Partner-Scale Economies, Service Bundling, and Auditor Independence in the Australian Self-Managed Superannuation (Pension) Fund Industry

SUMMARYUsing proprietary Australian Taxation Office (ATO) data, this study examines audit pricing, service bundling, and independence issues in the self-managed superannuation fund (SMSF) sector, the fastest growing and largest segment of the Australian $2 trillion retirement savings industry. We consider the impact of partner-level scale effects for a large sample of SMSF audits for the three years to June 2010. After controlling for factors known to determine audit fees, we find evidence of fee discounting by partners with large client portfolios. However, when the dependent variable is redefined to the total “bundle” of services (including audit and non-audit fees), the firms of partners with larger client portfolios are shown to earn bundling fee premiums. This finding suggests industry specialists price strategically using audits as a conduit to supply higher margin non-audit services (NAS) to clients with more resources. Last, we find no evidence the supply of NAS impairs auditor independence, alleviating joint supply concerns raised in the Cooper Review.

Beyond Lawyers: Legal Literacy for the Future

Modern life can be demanding for individuals. To meet these challenges, individuals can require literacy in many areas beyond reading and writing. For example, a growing area of concern has been financial literacy, as individuals face a myriad of decisions that are critical to their financial well-being (ASIC, 2011). However, there have been recent arguments that financial literacy should be expanded to include legal knowledge, especially tax law (Chardon, 2011). This argument is based on the fact that tax law can influence investment returns, deliver welfare payments and be used by governments to drive taxpayer behaviour (such as being a self-funded retiree) (Chardon, 2011). Recent research has demonstrated that Australians’ tax law literacy is lacking in many areas, with certain demographics at risk of lower literacy (Chardon, Freudenberg and Brimble, forthcoming). Research has also raised concerns about the legal literacy of Australian accounting students, especially as it relates to the law about trusts (Freudenberg and Boccabella, 2014). It appears that the current Australian tertiary accounting curriculum does not provide extensive coverage of law relating to trusts, even though trusts are a popular business structure that Australian accountants will need to advise on in their careers. This low legal literacy of accounting graduates is reflected in the additional legal literacy required by tax agents set by the Tax Practitioners Board, which extend beyond the legal education accreditation requirements set by the accounting professional bodies. Similarly, concerns have been raised about accountant’s legal literacy of Self-Managed Superannuation Funds (SMSF) given that SMSFs are largely absent from the Australian tertiary accounting curriculum (Freudenberg and Boccabella, 2016)An understanding of relevant laws and regulation appears to be important as research demonstrates that legal literacy of regulation could be related to compliance behaviour. Recent Australian research found that literacy in terms of SMSF regulation is likely to be significantly higher for those trustees of compliant SMSFs compared to non-compliant ones (Mihaylov, Tretola, Yawson and Zurbruegg, 2015). McKerchar (2002) has argued that greater understanding of tax law could reduce unintentional tax non-compliance.Legal literacy has been argued as an access to justice issue for women (Schuler and Kadirgamar-Rajasingham, 1992) and required to ensure a healthy democracy (Roznai and Mordechay, 2015). Also, the ILAC method (Issue, Law, Application & Conclusion) used in the teaching of law courses provides an important framework to develop students’ information literacy skills, which is critical graduate skill not only for law students but also other business advisors (Freudenberg, 2008). It is argued that legal literacy is an important area for future research, as a basic understanding of legal concepts and requirements can be seen as a critical skill required by individuals, businesses and advisors; and not just lawyers. An outline of some the current research being undertaking as well as proposals for future research will be canvassed.

Expectations and experiences of self-managed superannuation fund trustees

Self-managed superannuation funds (SMSF) constitute the largest superannuation sector in Australia with the highest total superannuation assets. As at June 2015, SMSF assets approximate AUD600 billion, or equivalent to 37% of Australia’s GDP. SMSFs are managed by fund trustees who are also fund members. The investment risk is fully borne by members. Despite its importance, the sector has not been subjected to as much research interest as other types of institutional superannuation funds. Furthermore, little is known about the individual trustees’ experiences on impact on regulation, risk protection against fraud. In this paper, we investigate the gap between the expectations and satisfactions of SMSF trustees in managing their superannuation assets. Online Survey method is used to gather data on a Likert scale. The survey comprised three sections. The first section of the survey covered demographic information of respondents. The second section aimed at collecting information on the trustees’ expectations. The third section was intended to collect information on trustees’ satisfaction through rating questions covering the cost, control, quality of financial advice, and investment performance when managing their own funds. The ratings of expectations in second section were compared with the ratings of experiences in the third section. The strength of association between ranked variables related to expectations and experiences was tested by Spearman correlation. Wilcoxon tests were also used to provide supporting results in comparing the expectations and experiences. Female or older respondents are more satisfied with fund performance. The satisfaction is correlated positively with fund size, due to the economics of scale in controlling fund costs. Respondents with a higher education level showed increased satisfaction. This may be due to their greater ability to process complex information and make better investment decisions. The difference between trustee expectations and experiences in major areas including the control of investment, cost, investment performance and service quality were not significant. There was a moderately positive correlation between expectations and experiences in regards to cost and control. There was a weakly positive correlation between expectations and experiences in investment performance. The positive correlation between trustees’ expectations and experiences is lowest in financial services. There is no significant misalignment between SMSF trustees’ expectations and experiences in major areas including control, cost, investment performance, and financial service quality. Although the regulation level is high, the protection against frauds and risks are low.

Financial literacy, financial judgement, and retirement self-efficacy of older trustees of self-managed superannuation funds

We investigate relationships between retirement self-efficacy, financial literacy and financial judgement across a sample of older trustees of self-managed superannuation funds (SMSFs). Aside from demographic factors, we explore self-rated dementia behaviours, general mental ability, mastery and risk tolerance. An increasing number of older people are controlling significant assets, particularly those who elect to become self-managed superannuation fund trustees. The ageing population, including self-managed superannuation fund trustees, is susceptible to cognitive decline with advancing age. We find that cognitive ability and self-rated behavioural dementia symptoms both relate to financial literacy. Variance in retirement self-efficacy was explained by age, cognitive ability, financial literacy, mastery and self-rated behavioural dementia symptoms. Those reporting dementia symptoms appear more vulnerable to making poor financial judgements. Findings have important implications for financial literacy interventions and the monitoring of on-going cognitive decline.

The Size, Cost and Asset Allocation of Australian Self-Managed Superannuation Funds

Using proprietary Australian Tax Office (ATO) data, we document the size, asset allocation and expenses for a sample of 209,420 Australian self-managed superannuation funds (SMSFs) for the three years to June 2010. Two recent Government reviews have highlighted a lack of basic knowledge of the costs associated with running an SMSF. Our study aims to address this paucity of research in relation to SMSF’s and has two objectives. First, on a descriptive level we provide evidence on the size and asset allocation of SMSF’s. Secondly, on an empirical level, we specify a model of SMSF costs. On a descriptive level we find heterogeneity amongst SMSFs in terms of both size and asset allocation. Further, our empirical analysis suggests cost advantages in running an SMSF. The analysis provides new insights into the fastest growing and largest segment of the Australian $1.83 trillion retirement savings industry and extends prior superannuation studies of both small and large APRA funds to SMSFs.

Understanding Assurance in the Australian Self-Managed Superannuation Fund Industry

Abstract Using proprietary data, this study examines auditor industry specialisation, professional brand effects and non-audit services (NAS) in the self-managed superannuation fund (SMSF) sector, the fastest growing and largest segment of the Australian $1.75 trillion retirement savings industry. We consider the impact of industry leadership for a large sample of SMSF audits for the three years to June 2010. After controlling for factors known to determine audit fees, we find evidence of fee discounting for the leading suppliers of SMSF audits, consistent with Simunic (1980)’s assertion of competition in the small audit client market. When considering the impact of professional affiliations, we find that registered company auditors and members of professional bodies who comply with auditing and ethical standards receive a fee premium. In terms of auditor independence, the supply of NAS is shown to improve the auditors’ ability to report breaches, suggesting no independence concerns arising from joint supply of audit and NAS in this setting.

Investigating the Influence of Cognitive Decline on the Quality of Financial Decision-Making in Older Adults: The Case of Self-Managed Superannuation Funds

As populations age, increasing numbers of older people are controlling significant financial assets at the same time as the level of choice in retirement funding arrangements also increases. The population faced with these investment decisions are the same population susceptible to cognitive decline with advancing age and particularly by way of dementia and Alzheimer’s. This study explores the relationship between cognitive ability, retirement self-efficacy, financial literacy and financial decision-making in a group of 103 SMSFs Managers aged 51 and over. Demographic variables (age, gender, education, value of superannuation), psychosocial variables (risk aversion, mastery), cognitive ability as determined by the Wonderlic, and self-reported dementia symptoms according to the HABC scales were explored as predictors of financial literacy, decision-making and retirement self-efficacy. Males tended to report higher levels of mastery than women, although this did not predict financial literacy. Women tended to involve family and friends more in financial decision-making, while men and women consulted with financial advisers equally. Cognitive ability ( ), Behavioural dementia symptoms (-) and total assets ( ) predicted financial literacy while retirement self-efficacy was best predicted by age ( ), cognitive ability ( ), financial literacy ( ), sense of mastery ( ) and self-rated behavioural dementia symptoms (-). Those with self-reported cognitive dementia symptoms appear more vulnerable to making poor financial judgments. Findings have important implications for financial decision making and the monitoring of on-going cognitive decline.

Will Self-Managed Superannuation Fund Investors Survive?

The relative risk aversion coefficient that characterises the representative self-managed superannuation fund (SMSF) investor reveals not only how much that investor dislikes risk but also other information about the investor’s economic characteristics, including how his or her allocations to risky assets change as his or her wealth changes. Determination of the relative risk aversion coefficient for the average SMSF investor reveals a value of 5.05. This value is too high to be consistent with logarithmic utility. This is significant because it implies that SMSF investors may be too risk averse to maximise the expected growth rate of wealth share accumulation. We are left to consider a very important question: Will SMSF investors survive?

Are Larger Self Managed Superannuation Funds Riskier?

In this paper, we examine the relationship between the portfolio size and allocation to risky assets that characterises self managed superannuation funds (SMSFs). In particular, we investigate whether the allocation to risky assets is higher for higher valued SMSFs. At this early stage of SMSF research the gathering of facts about these economic entities is necessary to guide policy makers and regulators. This study contributes to this small but growing body of factual knowledge regarding the microstructure of SMSFs in Australia. The results show that the percentage of the portfolios’ investable funds allocated to risky assets has no clearly defined relationship with portfolio size. A high net worth SMSF will, on average, have a greater absolute dollar amount invested in risky assets but the portfolio weightings may be such that a high valued fund has a lower percentage of its portfolio invested in risky assets than a much smaller fund. There is not a strong tendency for higher net worth SMSFs to bear greater risk through increasing allocations to risky assets but there is, nevertheless, a tendency for higher net worth SMSFs to have higher allocations to risky assets. Keywords : Self Managed Superannuation, Net Worth, Risk JEL Classifications : G11, G23, G28

Can self‐managed superannuation fund trustees earn the equity risk premium?

PurposeThe purpose of this paper is to determine whether self‐managed superannuation fund (SMSF) trustees earn: the equity risk premium or any premium to the riskless rate of interest.Design/methodology/approachUsing a sample of 100 SMSFs, the average annual returns since inception of the funds in the sample are compared with: the average annual equity risk premium since that time and the average yield of Commonwealth Government Securities since that time.FindingsThe investigation reveals: the SMSFs in the sample do not earn the equity risk premium and the SMSFs in the sample did not earn a premium to riskless rate of interest. This leads to the conclusion that the SMSFs have borne risk without commensurate reward. Research limitations/implications – The trustees' rationale for making particular investment decisions and the consistency of the portfolio structures with the risk profiles of the trustees are two areas that may be fruitfully explored in future research.Practical implicationsFor SMSF trustees, a simple portfolio that divides assets between (unmanaged) index funds and risk‐free securities on the basis of trustees' risk aversion may generate better results than the existing portfolios. For policy makers, the relatively poor performance of SMSFs implies that the superannuation system as currently structured may not be generating returns that will maximize retirement incomes.Originality/valueThe paper provides the first comparison of SMSF returns with the equity risk premium and the riskless rate of interest measured at appropriate horizons.