The SMSF Association has slammed the Productivity Commission for labelling smaller-sized self-managed super funds as "fundamentally flawed" and for not comparing returns on a level playing field.
In its submission to the Productivity Commission's draft report released in May, the SMSFA said the findings fail to consider the broader motivations why individuals set up SMSFs.
The Productivity Commission noted that SMSFs are broadly competitive with institutional funds in terms of net returns, and have tracked the long-term investment performance of the APRA-regulated segment on average.
"However, smaller ones (with less than $1 million in assets) perform significantly worse than institutional funds, mainly due to the materially higher average costs they incur due to being small. It is not clear how many of these will perform better in future as they grow in size," the report said.
Low-balance SMSFs incur high costs that are "significantly more" than APRA-regulated funds. "These high costs are the primary cause of the poor net returns experienced by small SMSFs on average. However, the number of new SMSFs with very low balances (under $100,000) has fallen from 35% of new establishments in 2010 to 23% in 2016," it said.
Furthermore, many of these smaller have "delivered materially lower returns on average than larger SMSFs."
SMSFA acting chief executive Jordan George said it is "unreasonable" for the Commission to conclude from its data that smaller SMSFs with are not cost effective.
Data, investment return calculations and the retirement demographics of SMSFs are factors that must be taken into account when making a comparison with APRA-regulated funds, he said.
In the 42-page response, the SMSFA provided alternative data to calculate SMSF investment returns and costs it deemed to be "more accurate" than the ATO data the Commission used.
"In addition, ATO cost and return calculations include SMSF establishment and advice costs that vary considerably to the costs incurred by APRA-regulated funds, in the process distorting SMSF returns, especially for new and lower balance funds," George said.
The SMSF cost-effectiveness debate must extend beyond a mere analysis of net returns and costs and consider the cost of running an SMSF over the long-term, he said, as well as the motivations behind members setting up their own funds, such as increased control and their individual retirement goals.