Keeping up with the times
The actuarial certificate market is amongst those most affected by digital disruption and price pressures facing the SMSF sector. Is the shake-up set to continue? Katarina Taurian reports
A word from our sponsor
The need for actuarial certification is often misunderstood and frequently taken for granted.
With the advent of advanced software for SMSF administration and for processing actuarial certificates, many in the industry make the misguided assumption that calculation of the tax exempt percentage is a doddle and should be left to the software.
However it is erroneous to assume that all in the industry are using well-developed software, or that all who operate such software are proficient.
In many of the certificate requests that come through the Act2 Solutions office, there is the need to run an experienced and educated eye over the details of the fund to ensure that the results are appropriate, accurate and even necessary.
Many in the industry simply assume that a certificate is required when there is a combination of pension and accumulation accounts, but this is not always the case.
The days of an actuary having to wade through the financials of a fund to determine the tax exempt percentage are becoming a distant memory, but administrators should be aware of why they are obtaining a certificate, and how it will affect the trustees.
There are circumstances where you may be surprised to learn a certificate isn’t always required.
- Andy O'Meagher
owner and director ACT2 Solutions
The growth in the SMSF sector over the last decade has been nothing short of phenomenal – the number of SMSF members has almost doubled, as have the total number of funds established.
As the sector has grown, compliance and reporting processes have become more efficient with thanks, in particular, to advances in technology.
One part of the SMSF sector that has arguably experienced some of the most pronounced shake ups is the actuarial certificate market.
The number of providers in the actuarial certificate market has “grown dramatically” in even the last four years, Andy O’Meagher, owner and director Act2 Solutions, told SMSF Adviser.
Prices of actuarial certificates have also been dramatically reduced, with Lime Actuarial’s owner Greg Einfeld suggesting prices in some cases have dropped as much as 70 per cent in the last decade.
“I have to accept some blame, in that I started a downward pressure on price years ago and that came about simply because of the fact that our process [was becoming] more efficient,” said Mr O’Meagher.
While there were likely some actuarial certificate providers using elements of automation a decade ago, Heffron SMSF Solutions’ head of customer Meg Heffron told SMSF Adviser they were few and far between, with most actuaries using a type of manual “pencil and a calculator” process to produce a certificate.
Ms Heffron also noted the skyrocketing demand for actuarial certificates today compared to previous generations.
“Say 20 or 15 years ago, lots of people just didn’t start pensions at all, they’d cash out their super,” she said.
“These days you have transition to retirement, new contributions coming in, you have a lot more publicity about pensions and pension planning, so you have a lot more hybrid funds which are the ones that need the actuarial certificate. So, the need has grown quite steeply.”
Total automation: is it viable?
With the rapid and widespread advances in the production and automation of actuarial certificates, organisations such as the SMSF Professionals’ Association of Australia (SPAA) have questioned their future.
“If you have a look at the form that you fill out, most of it is mechanical,” SPAA’s director for technical and professional standards, Graeme Colley, told SMSF Adviser.
“One of the things we were looking at with the government’s proposals to do away with red tape was the possibility that, in some cases, actuarial certificates are so mechanical that you could virtually have a formula to work out the amount of the income of the fund that was taxable and the amount of the fund that was non-taxable.
“I would think a statutory formula would be the way in which you would do it.”
However some, like Accurium’s consulting actuary Doug McBirnie, said he’s surprised that people in the industry are questioning the need for actuarial oversight.
“Given the level of scrutiny SMSFs receive in the mainstream media, I’m not sure it’s in the industry’s best interest to give the appearance that they’re pushing for less regulation or less compliance,” Mr McBirnie told SMSF Adviser.
“In terms of a statutory formula, I think given the complexities of the types of investments and strategies trustees are employing in their SMSFs, I think a formulaic approach isn’t possible for all the funds, it might be possible for some, but some certificates will always require an element of … professional judgement to determine what the appropriate tax exemption would be,” he said.
Drawing the line between what funds can take a formulaic approach and where the need for professional opinion would come in could also be problematic, Mr McBirnie said.
“Then that opens up the grey areas in-between and I guess opportunities for abuse and tax leakage,” he said.
Similarly, Ms Heffron said while a statutory formula may work in theory, identifying the cases where a statutory formula wouldn’t be appropriate could impose a bigger burden than obtaining an actuarial certificate.
“The load of finding the exceptions might well outweigh the benefit of having the statutory formula,” Ms Heffron said.
“The tax exemption on the tax return for pension funds [is] the biggest number on the tax return, and it’s really lucrative in that you get a huge amount of income tax exempt.
“From a revenue point of view, the tax office is naturally highly focused on that number, and is it such a bad thing that they’ve effectively grabbed another professional into that process to make sure it’s right?”
Ms Heffron said while SPAA’s assessment may be correct, in that by and large this is a “functional calculation”, at the moment there is no ideal alternative to actuarial certificates.
“When you don’t have a perfect solution for every case, you tend to over-regulate,” Ms Heffron said.
Mr O’Meagher, while acknowledging full automation may be possible in some cases, also said there would not be a reliable statutory formula that could be universally applied.
“Given the fact that the prices are now where they are, I think that should give the ATO a reasonable level of confidence to know that someone qualified is looking over these details, to make sure that for the more complicated circumstances the outcome is accurate and appropriate,” he said.
He also noted the need for professional oversight in an era where trustees have increasing levels of flexibility with their SMSFs.
“Some of the very popular software, it gives the users a great deal of freedom, and so that enables them to do all sorts of transactions that aren’t necessarily appropriate,” Mr O’Meagher said.
“So, you really do need someone with some experience and knowledge of the industry to run an eye over what is going on to pull them up when things are inappropriate.”
“Not just a piece of paper”
As well as providing a level of professional oversight for what is essentially one of the largest numbers on a tax return, actuaries can add value to other parts of an SMSF, said Mr McBirnie.
“Actuaries … go through a lot of training on investments and long-term reliability which fits perfectly with SMSFs as well. We’re well placed to look at things like adequacy, what level of assets trustees need to save to fund their retirement, and how do they go about mitigating the risks of retirement,” Mr McBirnie said.
Further, Ms Heffron said while every actuary in the country should theoretically give a trustee “the exact same number”, there are value-adds outside of the production of a certificate.
“An actuarial certificate is a commodity but often, the actuary is another professional that the accountant has access to when they’ve got something they’re not quite sure about,” Ms Heffron said.
Mr O’Meagher similarly said while it’s reasonable to say actuarial certificates are fairly vanilla, there are points of difference that separate each of the actuarial certificate providers.
“Certainly some of the differences that I’m hearing about from our clients are obviously in client services. So, not just in them receiving the certificate and the speed etc, but just in how they’re dealt with,” Mr O’Meagher said.
In further defence of the relevance of actuarial certificates, Mr Einfeld stressed that actuaries typically provide an advisory service off the back of their compliance service.
“For example the actuaries might see a particular fund and then based on the data that they receive, the actuaries might be able to provide some suggestions back to the accountant as to the strategy that the accountant could be putting in place with their client to put their SMSF into a better position,” he said.
The price push
As a consequence of increased competition and technological advancement in the actuarial certificate space, prices have dropped dramatically in the last 10 years. Consequently, many in the SMSF sector have expressed concern at the ability of a low-cost provider to deliver an accurate outcome to trustees.
Mr Einfeld said he’s often questioned on how accuracy is possible with the speed of delivery and price Lime Actuarial boasts.
“The response that I would give to that is ‘If I was using the old method and I received the data, I would perform some checks on the data to ensure that it looked reasonable’. And anybody who is producing certificates manually would do that.
“So there’s no reason why those checks can’t be programmed. There’s a systematic process that actuaries will typically go through to perform those checks, and I say, well take that systematic process and put some rules and some formulas in place to automate those checks.”
Mr Einfeld recalls a period when actuaries were “horrified” about introducing spreadsheets into their processes.
“We all look back at that now and say, well that’s ridiculous. I think over time people will become more and more comfortable with the automation that you can achieve using technology,” he said.
“Whether we’re talking about actuarial certificates or SMSF software or anything else that’s happening – technology is taking processes that people perform manually and it’s automating them.”
However, Mr Einfeld said total automation is not possible in all cases. Lime Actuarial has rules in place that identify more complex funds, and manual intervention follows, he said.
Industry concerns about low-cost providers is likely stemming from those who are concerned about their business models being disrupted, Ms Heffron said.
“I don’t have a concern specifically about low cost, I think prices in general are coming down. It’s a highly automated [process] and so it makes sense that prices would come down,” she said.
However, Ms Heffron expressed concern for those providers who do not request adequate information to perform the necessary calculations correctly.
“I’m concerned and surprised by that, because it’s not that hard. I don’t understand why you would get into this space and then not do it properly,” she said.
“I’m concerned about not doing what I think are essential checks that support the accountant, but I think it would be a fair argument to say that neither the law or our professional guidance notes require us to do those checks.
“So by not doing [it] I don’t think an actuary is necessarily doing the wrong thing, I just think it’s a kind of implied support role that we’ve filled for a long time and as more people get in without the same focus of supporting accountants, I think that service is being lost and we’re not noticing its passing.”
The pressures facing actuarial certificate providers can be likened to challenges facing the rest of the SMSF service provider market, Mr McBirnie added.
“The challenges we face as actuarial certificate providers is probably quite similar to most people practicing in the SMSF area. There’s price pressures; there’s increased competition,” he said.
“I think that’s a good thing for trustees, the cost of accessing an SMSF is coming down, and the breadth of services that are available is increasing.”
However, he noted it’s “paramount” these market pressures don’t affect the quality of service, particularly in the provision of a vital function like an actuarial certificate.
“We’re [the] gatekeepers for that important tax exemption in the pension phase,” he said.
“I think it’s important that exemption is well policed and I think actuaries are well placed to do that. [The] profession has a good reputation for accuracy and integrity, I think we’re well placed to continue to perform that function.”
The demand for immediacy
One of the major shifts in the actuarial certificate market has been the expectations on providers to provide increasingly fast turnaround times. Where actuarial certificates could previously take days to deliver, some providers now boast an instant turnaround.
“The quicker the better for the accountant. It’s usually the last thing they do before they submit funds for audit. So what they don’t want is a certificate that takes two or three days to get to them, because that slows them down. What they really want is to get an instant answer, which is why all these online forms have sprung up,” Ms Heffron said.
However, Mr McBirnie has his reservations about an instant turnaround on an actuarial certificate, believing in the need for a level of human oversight.
“To me you can’t provide an actuarial certificate instantly, there’s always got to be some sort of human oversight,” he said.
“The whole point in people obtaining an actuarial opinion on this is … you’re getting a professional service. There will always be some funds where the calculation of the tax exempt percentage is relatively simple, and for those ones the turnaround could be relatively quick.
“Part of it is checking to make sure there haven’t been any mistakes in the data we’ve been sent, and following up with those. But also, not all the calculations are that simple and there’s some professional judgement [needed],” he said.
The future of actuarial certificates
The SMSF sector, on the whole, is riding a wave of digital disruption. Processes that were previously manual are becoming automated, and basic compliance functions are being taken out of the hands of accountants and administrators.
The actuarial certificate market, according to Mr Colley, will not be immune to these changes.
“I think the way in which things are going there [will certainly be] more automation because there’s a downward pressure to resist the cost right across the industry and self-managed funds are not immune from that,” Mr Colley said.
“We would like to see … some more technology involved in it. If it’s possible to introduce a statutory formula to calculate that in certain cases, then we’d support that,” he said.
Ms Heffron believes prices will continue to drop, as transferring of data between SMSF administration software and actuaries continues to increase. Ms Heffron also said she wouldn’t be shocked if actuarial certificates were phased out at some point in the future.
“I’d be disappointed to see them go, but I wouldn’t be flabbergasted to see them go in my working lifetime,” Ms Heffron said.
“And I think what we’d then find is – it’s a bit like people who say they don’t need advice. Then the advice goes, and then they realise what they were getting out of that advice that they hadn’t really appreciated.”