Gearing should not have a place in multi-member super funds and would be difficult to implement within a member investment choice, superannuation professionals have said in light of last year’s legislative changes which permit funds to borrow for investment.
Jeff Bresnahan, managing director of super fund ratings agency SuperRatings, said that gearing among mainstream super funds could reach dangerous levels if a “herd mentality” developed, driving funds to borrow additional capital in an attempt to compete on performance.
According to Peter Bobbin, superannuation lawyer and senior partner with The Argyle Partnership, multi-member super funds are now legally able to use gearing to amplify member contributions. Following legislative changes made last year to subsection 67(4(a)) of the Superannuation Industry Supervision Act, self-managed and multi-member super funds have been empowered to gear for the purpose of investment. “The act is not limited to self-managed super funds: people are looking at it in the multi-member market,” Bobbin said.
One fund which has been driven to at least consider gearing is Equipsuper, the $4.4 billion multi-employer fund whose 47,000 members have, on average, an account balance exceeding $100,000. Chief executive Robin Burns said, some of the higher net-worth members have expressed an interest in gearing.
However, Burns said introducing a geared option would be complex and would have to be accompanied by financial advice. “We can only do things that service the fund as a whole,” he said. I don’t think people want to see their superannuation funds become financial institutions.”
Michael Seton, chief executive officer of the $3 billion industry fund AGEST, said that gearing member accounts would present funds with additional risk since many of the investment vehicles in which funds invest, and the underlying companies held by these vehicles, are already geared. “It adds to the risks. The investments have partial gearing in them.”
The demand from members for a gearing option in their super fund would probably be lower now than it was when the SIS Act changes were made, if new data from credit intelligence group Veda Advantage can be extrapolated.
Veda, which has a database of credit files for 14.5 million Australians, found a 6 per cent decrease in the number of people with two or three credit facilities in the six months to March 2008 (from 36 per cent last September to 30 per cent).