Meg Heffron
Managing Director
Given the amount of money in super in Australia ($4 trillion, of which SMSFs represent $1 trillion), it’s not surprising that there is a lot of focus on risk.
Interestingly, it’s often SMSFs that are portrayed as the more risky option for the community as a whole – as they put members in charge of their own nest eggs. To some, that sounds very risky.
But does that really tell the full story when it comes to the safety of our super savings?
I’d argue that all super sectors bring some level of risk and that risk is, in fact, a part of life. But the risks are very different. And perhaps that’s a good thing.
ASIC’s recent action against Cbus, accompanied by a flurry of press articles and social media criticism has highlighted a deep seated problem (and systemic risk) with the APRA sector and industry funds in particular: it is extremely difficult (and requires real people) to support members at scale.
If you’ve missed it, ASIC has commenced court proceedings against Cbus to have monetary penalties applied for the fund’s repeated failure to “act efficiently, honestly and fairly in the handling of claims for death benefits and TPD insurance[1]”. The major issue was very long delays in getting payments into the hands of beneficiaries at (often) the very worst moment of their lives.
There were thousands of members and their loved ones involved, and even after several years of being put on notice that ASIC was deeply concerned, it’s still not fixed. Cbus has chosen to largely blame a third party provider which does this work for them – Link Group. But in ASIC’s own words “Trustees cannot outsource accountability when it comes to claims handling. It is the trustee's responsibility to ensure there is adequate oversight of their systems and to prioritise the resources necessary to deliver the services they have promised to their members”. They’re fighting words indeed! From a naturally cautious regulator no less.
These very long delays are bad enough in themselves. They potentially lead to acute financial pressure on people who have enough going on already. (And don’t get me started about the fact that many industry funds put a deceased member’s balance in cash while they think about who should receive the benefit.)
But there’s actually another considerable risk not being talked about at all – yet.
When a super member dies, the amount of tax paid depends on who receives it. Generally, if it’s received by the spouse it will be tax free but if it’s received by adult financially independent children it will be taxed. If the deceased is over 65, the tax rate is no more than 17% (15% plus the Medicare Levy if applicable) but it’s potentially paid on the full amount of the death benefit. (So for context – a $500,000 death benefit could mean up to $85,000 in tax.)
So I wonder how many of these death benefits Cbus have failed to pay out would have gone to spouses who have died while waiting for their pay out? The long delay now has an added dimension – it has genuinely cost the beneficiaries large amounts of money.
I wonder whether there will be an action against Cbus for that too at some point?
This has to be a major issue just waiting to blow up?
The concentration of super in a small number of large funds, many of whom use the same suppliers (Link Group apparently supports around 80% of industry funds[2]) must present a real challenge for regulators when weighing up the systemic risks in the industry.
For example, the same supplier was blamed for terrible delays in death benefit payments by AustralianSuper – to the point where the fund voluntarily paid out $4.2m in compensation payments to impacted members and brought claims handling in-house[3]. A nice gesture perhaps but worth remembering that this will ultimately be paid by other members (large super funds maintain reserves to cover this sort of thing and they create them by skimming a little off the top of everyone’s super).
Clearly, life is not “risk free” in the APRA regulated sector of super. And the common themes are:
- Being big can be great but it brings particular challenges (like finding suppliers and dealing with human beings at scale)
- Guardrails can be fantastic but they can also create bureaucracy that is difficult to navigate (see point 1)
It prompted me to think about where the risks lie in the SMSF sector. They definitely exist. But they are quite different and perhaps mean less risk for the community as a whole in some ways.
So where could we see widespread failure that impacts many funds when it comes to SMSFs?
The obvious place to start is where there is concentration. For example, SMSF accounting software is dominated by two major players – Class and BGL. Failure of either of these would present enormous challenges for hundreds of thousands of SMSFs in that their accounting records would potentially be inaccessible - either for a time or forever.
But would it stop pensions being paid? Freeze investments? Prevent contributions? No – in the vast majority of SMSFs, that’s handled by the trustees themselves (via banking systems and investment platforms), not their accountants. Regardless of how much hair their accountant is losing over a software glitch, the trustees would continue to operate as usual.
The situation is entirely different for large funds. For a start, all these functions are much more interconnected. If a member asks a large fund for a benefit payment and “the record systems are down”, the money genuinely cannot be paid out (the large fund has no way of confirming the member actually has the money available to them).
In fact, this happened for Australian Retirement Trust (Australia’s second biggest super fund) as recently as early November 2024[4]. Their outage completely halted pension payments for nearly 100,000 people. Remember, for many people, super pensions are the equivalent of salary for the rest of us – something the recipients depend on for their living costs. And timing is important.
For the same outcome in SMSF-land, automatic payments via thousands of funds’ banking apps would need to fail.
According to major software provider Class, over 40% of SMSFs have bank accounts with Macquarie Bank[5]. So what if Macquarie fell over? For a start, a bank comes with some Government protections. But also – remember that only part of an SMSF’s assets will generally be in the bank account. Catastrophic failure of the bank doesn’t necessarily impact anything else. The trustee could still realise other investments. And of course let’s hope that CBA, NAB and Westpac remain fine – since they look after another 40% of SMSFs between them.
By their very nature, SMSFs are looked after by an army of individual members and trustees – the scope for failure across so many individually managed super funds is hard to see.
SMSFs’ key service providers (accountants, advisers) tend to be many and varied too. I estimate the largest provider of accounting services has around 5% market share. Within this myriad of accounting firms there are around 19,000 tax agents lodging tax returns for SMSFs. While some do a lot of them, nearly 18,000 (over 93%) do fewer than 100[6].
In contrast, AustralianSuper has around 3.5 million members and the Australian Retirement Trust has over 2 million. Let’s hope they don’t both depend on the same suppliers because failure there would impact more people than the entire SMSF population. (I have to confess this is said very much tongue in cheek – I don’t know but I expect there is a lot of cross over. Our super industry has too few players for there to be much diversification here.)
The achilles heel of the SMSF sector is not so much the scope for harm to the community (via a single failure having a widespread impact on a great many members), it’s the risk of harm to individuals. By definition, SMSFs are entirely in the control of their trustees / members. This gives the people who have them a unique opportunity to:
- Fall prey to scammers – if an unscrupulous actor can convince an SMSF trustee to follow their plan, all the members’ retirement savings are exposed. Even worse, the scammer can be instrumental in extracting the money out of the (more protected) APRA environment in the first place,
- Make poor choices – large funds tend to have guardrails designed to prevent members from over exposure to any one investment, for example. An SMSF trustee can choose not to have these, or
- Just getting it wrong – SMSF trustees are responsible for choosing all their suppliers and using their own knowledge plus support from their suppliers to follow the rules. They’ll need to get it right or risk the wrath of the ATO (and consequences).
When it comes to the risk of SMSFs, it’s often the “getting it wrong” risk that bothers people most. That said, my 25+ years’ experience would suggest that the ATO rarely seeks to throw the book at people who are genuinely trying to do the right thing but stuff up. They reserve their big guns for people who knowingly (and often repeatedly) do things like: take money out illegally, use super money to prop up ailing businesses or buy things that give the members a current day benefit rather than saving for retirement etc.
To be honest, it is hard to land in very very hot water by accident. For many less serious breaches, the ATO usually looks to have the trustees fix the problem first and then escalate to penalties if it happens again. Often the worst possible thing that can happen to an SMSF is it’s declared “non complying”. Then, the fund loses all its tax breaks and is hit with a very large tax bill of up to 45% of all its assets. Before issuing a notice of non compliance, the ATO considers much more than just “did the fund break the law” – things like whether there were multiple breaches of the law, was it an honest mistake or was it intentional, were the trustees reckless and how serious were the breaches are taken into account.
In all three of these scenarios (scams, bad choices or non compliance), the harm to the community is one step removed. If an SMSF fails and the members end up relying on the age pension in retirement, valuable tax concessions have been squandered. The Government could have used the money for something more useful.
That is – very fairly – where many point the finger at the risks associated with SMSFs. But it’s also where the guardrails already in place for SMSFs are critical.
A compliance and financial audit would be unheard of for any other private entity (like a private company or trust). But it’s required for every single SMSF every single year. Auditors are effectively the ATO’s first line of defence.
This is why a competent and ethical audit population who report the right things back to the ATO is vital. It explains why there has been so much focus on audit independence in recent years. They need to be independent of not just the trustees but also the other service providers involved with the fund.
So is concentration an issue here? The negative press received by Big 4 accounting firms in recent years highlights that bigger doesn’t always mean more competent or more ethical. But again – there are some 3,000 individual SMSF auditors. While there are indeed some larger firms auditing (say) more than 50,000 SMSFs, there is also a vibrant community of highly competent and skilled smaller firms.
The major risk when it comes to audit is perhaps the race to the bottom in terms of fees. While it’s great for SMSF trustees to get all their services delivered cost effectively, it would be a risk if only the largest firms can remain profitable. If the sector loses its diversity of personnel, thinking and process here, it will be poor outcome for our resilience.
What all this tell me is that there are risks in all our super sectors – including SMSFs. For sure. But this is one area where the SMSF sector’s disaggregation is its strength. The risks are generally most likely to be realised and are most acute at an individual level rather than sector wide. In some ways, SMSFs may even provide greater protection for Australia’s super nest egg than the APRA sector.
[1] ASIC media release, 12 November 2024 “ASIC sues Cbus alleging systemic claims handling failures”
[2] AFR 29 October 2024 “The next big threat to our $4 trillion super sector might lie within”
[3] AFR 20 November 2024 “AustralianSuper pays members back $4.2m over claims handling delays”
[4] SMH 2 November 2024 “A major super fund had an outage this week. Almost no-one realised”
[5] Class Benchmark Report 2024
[6] ATO Annual statistical report 2021-22, published July 2024
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