Illustration: Sam Bennett.
When regulators, superannuation funds, unions and investment banks start banging the drum in the media about the dangers of self-managed super funds fuelling a property bubble and distorting equity markets, it smacks of fear - and in some quarters loathing with a twist of self-interest.
In the past few months the Reserve Bank and the corporate regulator have hit the headlines warning about the risks of self-managed super funds (SMSFs) investing - and borrowing - too much in property and fuelling a property bubble.
Their warnings were seized upon by the local boss of Morgan Stanley, Steve Harker, who said he was ''deeply worried that Australia is sowing the seeds of its next financial crisis by allowing people to borrow money in their self-managed super funds in order to buy property''.
It prompted Paul Howes, national secretary of the Australian Workers Union, to write an alarmist opinion piece warning that SMSFs were an accident waiting to happen. ''Acronyms like CDSs, CDOs and MBSs once held little meaning for most Americans. During the national global financial crisis post-mortem, of course, they suddenly took on a frightening new presence. Lately, I've started fearing Australians may one day feel similarly about self-managed super funds,'' Howes wrote.
He says $75 billion worth of property is held in SMSFs and warns that the number of SMSFs borrowing in the past four years has tripled. ''And if this government is serious about reforming the rorts in our super system, the SMSF sector is the place to start.''
He makes a legitimate point, particularly with the rise of property spruikers, but what he doesn't say is property is split between residential and commercial, with an estimated $18 billion invested in Australian and offshore residential property, which represents less than 5 per cent of SMSF assets. To put the leverage into perspective, the ATO estimates SMSFs have about $7.1 billion in debt, which is less than 2 per cent and is spread across all assets, not just property.
Hot on the heels of Howes' comments came a controversial report from Credit Suisse this week arguing that SMSFs are ''retarding investment, employment and growth in Australia''.
The report estimates that the SMSF sector, which represents $531 billion of the country's $1.7 trillion retirement savings, accounts for 16 per cent of the ASX. This sheer weight of money, it argues, and a strong appetite for yield plays, is having a distorting effect on decisions being made by corporate Australia in terms of capital management: share buybacks and dividend payments versus capital expenditure. ''They control much of the equity that could be used for new investment but are demanding dividend increases instead,'' the report says.
It's a good point, but investment banks have been frustrated in the past few years at the tepid appetite of listed companies to do corporate deals.
Industry funds have also waded into the debate, as have many others.
It is not hard to see why. Since the GFC erupted, revealing many of the cracks in the country's superannuation system, including the antiquated structure of boards, lack of transparency, conflicts of interest, high fees being charged by retail funds and, most of all, poor performance, many Australians decided to shift their assets out of industry and retail funds and into SMSFs to see if they could do a better job.
To put it into perspective, during the GFC the super industry suffered its worst performance in 20 years and well over $150 billion in value was lost from the funds.
It has also emerged that what some funds meant by balanced funds didn't necessarily mean they were balanced, and cash didn't necessarily mean cash because industry regulations allowed some property and share investments to be defined as cash.
Back then, stories abounded of Australians being forced to postpone their retirement plans due to the poor returns of their super funds.
Since then the SMSF sector has grown 27 per cent to 509,000 funds, with at least 27,000 new funds being set up each year, according to data from the ATO. Total assets are estimated at $531 billion, which is a big chunk of money.
The problem for the authorities is SMSFs are hard to monitor because there are so many of them. There is also a time lag between their performance and where they are investing.
What is known is that due to the relatively small size of the funds they don't have the same diverse asset allocation as the bigger funds, unless they invest in fund of funds or ETFs or international index funds.
The upshot is many are heavily weighted towards term deposits, equities and property. Indeed, the latest figures from the ATO reveal that SMSFs invested $154 billion in cash and term deposits, which represents almost 30 per cent of all SMSF assets, as at September 30, 2013.
With interest rates at record lows and Australia's inflation rate on the rise, the real returns on cash are falling. This, coupled with the sharp fall in the Australian dollar, could have an impact on equity returns in the next 12 months unless they start increasing their allocation to overseas assets.
A debate on the rise of SMSFs and the impact they are having on the financial system is an important one to have. Unscrupulous property and investment spruikers are out in full force trying to tap this growing pot of money of unsuspecting investors.
But to date there are no signs of a systemic failing and, with more than a million Australians investing via a SMSF, the chances of the Abbott government imposing restrictions on the funds has a snowflake's chance in hell of happening.