The panel has recommended a removal of the exception to the general prohibition on direct borrowing for limited recourse borrowing arrangements by superannuation funds.
“Government should restore the general prohibition on direct borrowing by superannuation funds by removing Section 67A of the SIS Act on a prospective basis,” the report stated.
“This section allows superannuation funds to borrow directly using limited recourse borrowing arrangements.”
However, the report stated the exception of temporary borrowing by superannuation funds for short-term liquidity management purposes should remain.
While the FSI acknowledged the level of borrowing is currently relatively small, the report suggested if direct borrowing by funds continues at current growth rates, it could pose a risk to the financial system.
The report stated this recommendation seeks to prevent the unnecessary build-up of risk in the superannuation system and the financial system more broadly.
In addition, the recommendation seeks to fulfil the objective of superannuation being a savings vehicle for retirement income rather than a “broad wealth management vehicle”.
The report noted that lenders can charge higher interest rates because of the higher risks associated with limited recourse lending, and “frequently” require personal guarantees from trustees.
It also pointed to the likelihood of borrowing to concentrate the asset mix of the fund, thereby reducing its diversification and increasing its risk exposure.
“Further growth in superannuation funds’ direct borrowing would, over time, increase risk in the financial system,” the report stated.
“Borrowing, even with LRBAs, magnifies the gains and losses from fluctuations in the prices of assets held in funds and increases the probability of large losses within a fund.”
In relation to superannuation more broadly, the FSI has recommended the government seek broad political agreement for, and enshrine in legislation, the objectives of the superannuation system and report publicly on how policy proposals are consistent with achieving these objectives in the long term.
The report also called for consistent policy settings across the accumulation and retirement phases.
“Consistent policy settings across the accumulation and retirement phases would meet the retirement income needs of Australians more efficiently and effectively. It would also assist Government in implementing policy settings that are well targeted and sustainable over the long term,” the report stated.
The FSI stressed that the super system needs to adapt to changing circumstances but to avoid unnecessary or ad hoc changes that cannot be sustained over time.
I trust that the borrowing limitation will apply to all funds: that is SMSFs and public funds such as the Colonial Australian Share Market Geared Fund. And to really see why these people don’t live in the real world the comment “In addition, the recommendation seeks to fulfil the objective of superannuation being a savings vehicle for retirement income rather than a broad wealth management vehicle has to be a joke, right? How is it possible to create superannuation savings without building up the wealth of the super fund? Takes the breath away!!
George Lawrence
Please clarify the difference between ‘a savings vehicle for retirement’ and ‘a broad wealth management vehicle’. Aren’t they the same thing? Isn’t the end result to have as much put away for retirement (build wealth via savings) to live a comfortable life free of government handouts? Don’t the regular superfunds drive that wealth management vehicle for their clients?
The term “Safe as houses” will forever ring true in my ears. I can’t see any signs that rents will have a massive decrease in the near future and as long as wages and rent’s go up property prices will increase. If interest rates go up, so will rents! The GFC did horrible damage to my retail superfund retirement plans but I’m confident in my current little nest egg. Next step is to buy another one. I Don’t trust shares and/or speculation at my stage of life nor do I want to pay more fees to people who previously gambled with my retirement funds. Limiting my choices would loudly affect my vote.
Its amazing the suggestions for changes that arise once certain industry sectors that took commissions from everyday people for years placing them in situations which history now has proven to have been devastating for many numbers of them, are now projecting a broader long term view which appears to be seeking to have some control back by restricting areas of investment where they can’t make the commissions or fee for service like they used too.
There are many places that everyday investors can make better returns than they ever did whilst others were managing their super interests. Everyone should stay focussed on what is actually good for clients and not controlling or restricting how funds can be utilised where the ultimate aim maybe for an industry sector to channel more income to themselves.
SMSF currently overweight shares and cash, the first more volatile than property and the other eaten away by inflation. From a strategy point of view Property is well suited to long term saving ( I do not sell, promote or receive any commissions on property). I am in favour of reduced LVRs but to ban LRBAs outright would be to deny those that are not in life time stable careers the ability to take on some additional leverage to fund their own retirement. A small business owner, women returning to work, immigrants like myself all benefit from taking on some leverage to catch up on the missing years of contributions. I have not used property myself in super (I have for clients) but have leveraged equities and having reduced that exposure was looking at a 50/50 leveraged property next(possibly a business premises). Over the 25 years I have to retirement I believe that would have been a sound strategy as part of my overall portfolio.