The use of leverage in superannuation funds to finance asset purchases is embryonic but growing. The proportion of SMSFs with borrowings increased from 1.1 per cent in 2008 to 3.7 per cent in 2012. The average amount borrowed increased over this period from $122,000 to $357,000. Total borrowings in 2012 were over $6.2 billion.66 More recently, Investment Trends research found that, over the year to April 2014, the number of SMSFs using geared products increased by more than 11 per cent to 38,000.67 Leverage in APRA-regulated funds is small, with total borrowings of under $2 million reported each quarter over the past year.68

Preliminary assessment


If allowed to continue, growth in direct leverage by superannuation funds, although embryonic, may create vulnerabilities for the superannuation and financial systems.

Leverage is widespread across the financial system and magnifies risk on both the upside and downside. In superannuation, direct leverage, other than to address very-short-term cash flow and liquidity needs, was originally prohibited to reduce the risk to retirement incomes but has since been incrementally permitted.69 In 2007, the Superannuation Industry (Supervision) Act 1993 (SIS Act) was modified to allow all superannuation funds to borrow with the primary intent to legitimise investing in instalment warrants, which have embedded leverage. Further amendments in 2010 clarified the terms of this borrowing.

The GFC highlighted the benefits of Australia’s almost entirely unleveraged superannuation sector. The general absence of direct leverage in superannuation funds meant that losses were not magnified. This enabled the superannuation sector to have a stabilising influence on the financial system. A clear example of this was the amount of equity funding the sector provided to the banking system in 2009. This was beneficial for superannuation fund members, taxpayers, the financial system and the economy.

The ability of funds to borrow may, over time, erode this strength and could contribute to systemic risks to the financial system. For example, a fund with directly leveraged exposure to asset price volatility may have to post margins if asset prices fall. If many funds are exposed to the same assets, or at least assets with correlated returns, they may be forced to sell some assets to fund these margin calls. This could cause the price of the assets to fall further and potentially trigger a downward spiral, which could have flow-on effects to other parts of the financial system. Moreover, it could compromise the superannuation system’s ability to provide adequate incomes in retirement and transfer risk to the Government in the form of higher Age Pension outlays.

Some evidence also suggests that borrowing in superannuation is often associated with poor financial advice. For example, an Australian Securities and Investments Commission (ASIC) review of over 100 selected investors’ files found that much of the poor advice on setting up SMSFs provided by financial advisers and accountants related to establishing an SMSF as part of a geared investment strategy.70 This Inquiry shares the Super System Review Panel’s view that leverage should not be a core focus of SMSFs — or any superannuation fund — and is inconsistent with Australia’s retirement income policy.71

Policy options for consultation

The general prohibition on borrowing in superannuation was introduced for sound reasons. Although levels of direct leverage in the superannuation sector are low, they are increasing. Removing direct leverage in superannuation is consistent with the concept that superannuation tax concessions should apply to funds that have been saved and not borrowed. There are ample opportunities — and tax benefits — for individuals to borrow outside superannuation.

However, borrowing on a short-term basis to address unexpected liquidity needs is appropriate. This has always been permitted under the SIS Act.

The Inquiry would value views on the costs, benefits and trade-offs of the following policy option or other alternatives:

Restore the general prohibition on direct leverage of superannuation funds on a prospective basis.

66 Australian Taxation Office (ATO) 2013, Self-Managed Super Funds: A statistical overview 2011-2012, ATO, viewed 24 June 2014.

67 Investment Trends 2014, SMSF Investor Report, April. Note: Based on a survey of 2,163 SMSF trustees.

68 Australian Prudential Regulation Authority 2014, data provided to the Financial System Inquiry, 3 June 2014.

69 Commonwealth of Australia 2010, Super System Review Final Report, Part Two, Overview and Recommendations, Commonwealth of Australia, Canberra.

70 Australian Securities and Investments Commission (ASIC) 2013, SMSFs: Improving the quality of advice given to investors, Report 337, ASIC, Sydney. The majority of files selected to review involved investors with a fund balance of $150,000 or less and included some, or all, of the following features: older members, low incomes, borrowing and investment in a single asset class.

71 Commonwealth of Australia 2010, Super System Review Final Report, Chapter 8 — Self-managed super solutions, Commonwealth of Australia, Canberra.