Scrutinise SMSF ‘systemic risk’: Minter Ellison

When an investor sets up their own SMSF, in practical terms they are outside the regulatory environment most superannuation funds are subject to, he said.

“That’s fine when it’s small numbers, but once you now get to the stage where 30 per cent of the superannuation monies are invested in SMSFs, you now have a systemic problem,” Mr Girgis said.

One risk with SMSFs is that they won’t achieve their objective of providing a retirement income for their members, he said.

While all funds, including APRA-regulated funds pose this risk, with SMSFs “you have no idea” whether the funds are being invested wisely, he added.

“If they don’t meet the objectives, what’s the result? They go back on the public purse,” Mr Girgis said.

“The very genesis of a superannuation system is to take pressure off the old age pension requirements of the commonwealth government,” he added.

Mr Girgis said the government should consider potential solutions such as only allowing certain types of investor to set up SMSFs, such as "sophisticated" investors or those with a certain amount of assets.

He also said the government’s inquiry should look at options such as a licensing regime for SMSFs, given that the government is extending concessions to SMSFs with a view to “relieve the public purse”.

When asked if the SMSF sector should come under APRA’s regulation, Mr Girgis said APRA is unlikely to have the appropriate resources.

“In fact it’s difficult to see how any regulator can have the resources necessary to regulate [SMSFs], because of the sheer numbers.”

Mr Girgis also noted the government should look into the types of asset that SMSFs are permitted to invest in, but which “relatively large” funds are not, such as property and exotic investments.

“Maybe the government should look at whether they are really appropriate for retirement incomes,” he said.