The government has taken its first step towards reining in borrowing by self-managed super funds. This week the Superannuation Minister, Chris Bowen, announced legislation which will require anyone offering loan products to these funds to be a licensed financial services provider, subject to the same controls and monitoring as other financial products.
He also announced changes to the tax laws to ensure that the super funds are regarded as the owners of the underlying assets in these borrowing arrangements, even where they are held by an outside trustee.
But with borrowing arrangements being aggressively marketed in some parts of the industry, questions still remain as to whether funds should even be allowed to gear members' retirement savings, and if they are, whether borrowings for big assets such as property are within the spirit of the law.
The problem is that, despite our compulsory super system, most people within cooee of retirement (and we're talking about people in their 40s as well as baby boomers) have nowhere near the savings they need to fund the retirement they want.
This makes them prime candidates for more aggressive investment strategies aimed at plugging the shortfall quickly.
The government hasn't helped matters by slashing the concessionally taxed contributions investors can make each year. If you're under 50, you're now limited to tax deductible contributions of $25,000, including compulsory super.
Financial planners report this has forced many investors to consider alternative investments such as negative gearing. Mortgage brokers such as Australian Finance Group are reporting record levels of investment loans, and margin lending is also on the way back up.
Limiting super contributions also puts pressure on fund members to get the maximum bang for what money they do have in their funds. At a time when, ideally, members should be preserving their assets, some are moving further up the risk spectrum.
They may be lucky, but you can't help thinking there's an accident waiting to happen.
One of super's unsung advantages is that it has traditionally played a role in protecting investors from their own excesses. We might get sucked into hot stock stories or aggressive gearing with our non-super investments, but super portfolios tend to be more textbook in style: diversified, balanced and targeted to producing solid returns, not spectacular ones. Even self-managed funds have provided this benefit, with most funds holding blue chip shares and cash as their major assets.
Yes, super funds were well represented in many of the recent corporate failures and whether you are in a public or private fund odds are you copped a belting from the global financial crisis. But for many investors, super was a moderating influence on their total portfolio.
Increase the risk in super and you significantly increase the risk of investors suffering lifestyle-damaging losses.
So while investors can make their own decisions about how much risk they'll take outside super, the government needs to think very carefully about how much risk they should be able to take within it.
As regular readers will be aware, allowing gearing within self-managed super funds is a recent occurrence. The Howard government introduced legislation in its final days in 2007 to clear up uncertainty about the use by these funds of instalment warrants. But instead of allowing funds to invest in these existing products, the legislation opened the door to wider use of non-recourse lending.
If you haven't been acquainted with the joys of non-recourse loans, they're highly attractive at first glance. Unlike traditional mortgages, they are secured only by the underlying asset. So if it falls in value to less than the outstanding loan, the lender sells the asset as full repayment. It can't chase you for any remaining unpaid amount.
At least, that's how traditional instalment warrants over shares work. The lenders can do this because part of the cost of the instalment covers the purchase of derivatives to ensure the lender won't end up out of pocket.
With property instalments, however, derivatives aren't an option. So what many lenders have been doing is obtaining personal guarantees from the fund's trustees in addition to holding the underlying property. Whether these guarantees are within the rules is just one of the remaining grey areas for these products.
The Cooper inquiry into the super system has raised borrowing by super funds as an issue for consideration and Bowen says the government is still considering other areas of uncertainty.
He needs to go further, but as an initial step this week's measures should at least weed out some of the sharper loan arrangements and ensure promoters of loan products play within the rules.
By bringing instalments into the Corporations Act, industry sources say only licensed providers will be able to offer them to self-managed funds (though there will be a three-month ''window'' before it is applied). The technical services director of Multiport, Philip La Greca, said it will ensure the appropriate questions are asked by any person recommending these structures, such as whether the fund has the capacity to service the loan, and the diversification and liquidity risks posed.
ASIC will have the power to pursue promoters who do not play by the rules.
The tax changes clarify that the fund will be treated as the owner of the underlying asset, removing uncertainty that capital gains tax may have been triggered when the debt is paid off and the asset transferred from the trust holding it via the loan package to the fund.
