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Self Managed Super Fund (SMSF) Article
Small funds now biggest sector of super industry

By Tony Negline.

This article may be out of date.

1st October 2008

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Last week the ATO released revised data that shows that small super funds recently became the biggest segment of the superannuation industry.

The improved data has only become available because the ATO has finished collating all the information gathered from small super fund annual returns for the 2007 tax year.

It goes without saying that this occurrence is fundamentally important to the make-up of the superannuation industry.

The growth rate in the number of DIY super funds and the increase in the amount of money invested in these funds since June 2006 is nothing short of phenomenal and has surprised many funds management experts.

The Tax Office now estimates that at June 2007 there was $335 billion in small super funds.  This is an amazing twenty five percent increase on their estimate for June 2007 published in July this year

Also in July Deloitte Touche Tomatsu, one of the big four accounting firms, published a report which predicted that small super funds would become the largest super fund type when looking at assets under management.  But Deloittes did not expect this to happen for several more years.

Small funds now have 28% of all super fund assets (the old figure was 25%).  By 2021 Deloittes predict small super funds to have 37% of all super assets when it expects total super assets to be nudging $4 trillion.

The ATO says that in 2006/07 about 40,000 new small super funds were created.  This is a much larger number than the longer term average (typically between 20,000 and 30,000 funds per year).  In the same year, the number of small super funds with assets greater than $1 million increased by over 42,500.

In net terms nearly all the growth that occurred in the number of funds in 2006/07 occurred at the larger SMSF asset segment.  This is an important development and is due in part to the Better Super changes which allowed up to $1 million in personal contributions before 30 June 2007.

Small super funds with more than $1 million made up 12% of all small super funds in 2003/04.  By 2005/06 this segment had grown to 19%.  But twelve months later in June 2007, funds with more than $1 million had shot up to just below 30% of all SMSFs.

It will be interesting to see if the number of large super funds continues to grow in future.

The average assets per SMSF was $940,000 at 30 June 2007 which is almost double the 30 June 2004 figure and forty percent more than the 2006 figure.

Importantly the ATO data suggests that it has not costing SMSFs more money to run their fund over the last five years.  In 2006/07 it cost about 1.4% of total assets under management to administer these funds which is the same figure as in previous years.  Deloittes predict this will fall to about 1.25% of assets in 2021 for SMSFs.

The ATO data on small fund asset allocation shows the inability of fund managers to get traction in distributing their investment funds to SMSFs.  Fund managers have only 6% of SMSF assets.  This figure has not increased since 2004.

As the Deloittes' report noted, "the predicted growth in … SMSF assets is staggering and is driven by their use as a repository for post retirement assets, primarily for members with larger benefits.  It is no coincidence that some institutions are looking at how they can develop services that can effectively compete with SMSFs or indeed to service the large SMSF market."

By way of contrast, about 30% of small fund assets are invested directly into listed shares and it is reasonable to assume that the majority of this is in ASX listed equities.

What about the cash holdings of small super funds?  Some 27 percent of all super fund assets (or about $97 billion) is said to be in cash, term deposits and debt securities.  Research firm, Investment Trends has estimated on average small funds keep about 14% of their assets in at-call cash accounts.  This suggests that the remainder (that is 13%) is invested in term deposits and other debt securities.

SMSFs are the only major segment of the superannuation space that is showing any significant growth.  As with previous market down-turns there is an expectation that some people with larger super fund balances will move out of their retail or corporate super arrangements and set up their own small super fund.

There are now just under 400,000 small super funds and that milestone will be passed before Christmas this year.  Twenty percent of small funds have one member and 70% have two members.

In years gone by between 4,000 and 5,000 small fund were wound up.  In the 2006/07 this number fell to about 700 small funds.

Late Lodgement Prosecutions

In other news the Tax Office has also revealed it has successfully prosecuted about 50 small fund trustees for lodging their super fund returns late.  Most trustees were fined about $2,000 for each year that they lodged late.  One change introduced by the Better Super changes was to enable the ATO to more easily seek the imposition of fines for the late lodgment of super funds returns.

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