New data collected by the Productivity Commission confirms self-managed superannuation funds with smaller balances tend to have high costs and poor returns.
A report released on Friday says analysis of fresh Australian Tax Office data indicates that self-managed superannuation expense ratios are more clearly related to fund size than fund age.
“Those SMSFs that remain small appear to continue to experience high costs and low returns on average, even well after establishment costs have been paid,” it says.
“Forty-two per cent of established SMSFs – some 200,000 SMSFs that were older than two years in 2016 – have under $500,000 in assets, facing high costs and low returns on average.”
The commission’s May draft report into the competitiveness and efficiency of the super system found the self-managed segment of the market had broadly tracked the long-term investment performance of retail and industry funds.
But funds with balances of less than $1 million had delivered “materially lower returns” on average than larger self-managed funds because investment earnings are heavily eroded by the costs of running the fund.
The May report said the difference between returns from the smallest self-managed super funds and the largest – that is, those with over $2 million – exceeded 10 percentage points a year.
“Costs for low-balance SMSFs are particularly high, and significantly more so than APRA-regulated funds,” the report said.
“These high costs are the primary cause of the poor net returns experienced by small SMSFs on average.”
The report was criticised by some industry players, who suggested the findings were biased by the inclusion of one-off establishment and wind-up costs.
But the commission has not changed its view that size matters, and it matters more than the age of the fund.
“To the extent that new SMSFs incur high initial costs but quickly grow to over $500 000 in assets … they may then experience a reduction in expense ratios and an increase in net returns,” the latest report says.
“However, those that remain small appear to continue to experience high costs and low returns on average, even well after establishment costs have been paid.”
In 2016, about 42 per cent, or 200 000 funds, were in this category.
That is, older than two years and with balances of less than $500,000.
“That said, this need not imply that all SMSFs with balances under $500,000 are generating poor net investment returns,” the report concedes.
“Averages conceal variation, and so some SMSFs within this group may well have lean costs and high net returns.
“A further possibility is that there are tax advantages to members that are not fully reflected in the net returns data.”