The annual superannuation performance test results are just days away and some Choice options will also be under the microscope for the first time this year.
Next Thursday (31 August) the results of the annual super performance test will be announced. This test, introduced as part of the Your Future Your Super (YFYS) reforms, measures a fund’s investment performance against a relevant benchmark.
Originally, the test only applied to MySuper (default) super products. However, from this year the performance test now also applies to some Choice fund investment options, and therefore could impact an adviser’s clients where they have invested their super in an option that fails the test.
Which investment options are subject to the test?
The first thing to note is that not all investment options are subject to the test. Instead, it only
applies to those investment options that satisfy the definition of a Trustee Directed Product (TDP).
TDPs are investment options in the accumulation phase where both:
- The trustee (or their associate) sets the strategic asset allocation and manages the investments, and
- The investment option is invested into two or more asset classes. Note – if an option is invested in only two asset classes, it will only be considered a TDP if each asset class has a strategic asset allocation of more than 10 per cent.
For example, a fund’s own in-house diversified or multi-sector investment options would generally be included in the definition of a TDP. However, the fund’s in-house Australian shares option, which has an allocation of less than 10 per cent to cash, would not be considered a TDP.
However, there are also some important exclusions. For example, if a fund offers an investment option where an unrelated asset manager sets the strategic asset allocation and manages the investments, the option will be excluded from being a TDP.
Additionally, an investment option will not be considered as a TDP if:
- A member is able to influence the investment strategy.
- The option supports an income stream.
- The option is risk only or relates to a defined benefit interest.
How does the performance test work?
The performance test is a little complicated, but basically works by comparing a TDP’s 9-year return (10 years from next year) against a relevant benchmark return based on the TDP’s asset allocation.
The outcome is then adjusted by adding back the difference between a median industry administration fee (based on fund type) and the actual administration fee charged.
For TDPs on master trusts, returns are calculated net of investment fees and tax. However, for TDPs on wrap platforms, returns are calculated net of investment fees but gross of tax to better reflect how these products operate.
The median industry administration fee used will also vary depending on the type of fund involved. For example, the test will use a different median industry administration fee for TDPs offered through wrap platforms compared to those offered through master trusts. This is to recognise the different levels of service provided by the different types of funds.
TDPs that underperform the relevant benchmark by 0.5 per cent or more will be deemed to have failed the
performance test.
What happens where a TDP fails the performance test?
If a super fund’s TDP fails the test, the trustee must notify all the members that were invested in that TDP within 28 days of APRA notifying the trustee of the result which is no later than 31 August.
The trustee notice must use prescribed wording that warns the members their super is invested in a product that has failed its annual performance test and that they should think about moving their money to a different super product. The notice must also warn the member that their money will stay in the relevant product unless they move it and that switching is easy and they could save thousands of dollars more for when they retire by switching to a better product.
If a TDP fails the performance test for two consecutive years, the fund must close the TDP to new members until it can pass the performance test again.
Next steps
Advisers who have recommended their clients invest in choice superannuation funds may wish to contact those funds to confirm whether any of their clients have exposure to a TDP investment option that is likely to fail the performance test.
If this is the case, an adviser may wish to consider proactively contacting affected clients before they receive the letter from their fund. This will allow the adviser to inform clients of the situation and address any questions or concerns they have with how their super is invested.
Craig Day is executive director of FirstTech at Colonial First State.
