InFocus: Will multiple failures of the APRA super fund performance test prove fatal?

What would it take to provoke a run on a superannuation fund?

Would it take members of that fund receiving a letter sent to them at the direction of the Australian Prudential Regulation Authority (APRA) that their superannuation product has performed poorly, and that they should consider moving their interest into a different fund?

Because that is what is being proposed within the Government’s Your Future, Your Super legislation and is clearly outlined in the explanatory memorandum.

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What is more, the members would be receiving that letter only after their fund had at least twice posted notifications on its website that it had failed to pass the APRA-administered performance test.

The regulatory outline creates scope for funds to resume accepting new members when they have actually passed a subsequent performance test, but the question must be asked about how many people would want to join a superannuation fund which had arguably failed three performance tests.

While the boards of superannuation funds still bristle about “inaccuracies” associated with APRA’s superannuation fund heatmaps, the Government’s legislation is handing even more power to the regulator to administer a superannuation performance test and to require funds to notify members when they fail that test.

The explanatory memorandum attaching to the Your Future, Your Super regulatory consultation, states that superannuation funds who fail the performance test must provide notices to the beneficiary’s last known mailing address or email address.

“All beneficiary notifications must explain to the member that their superannuation product has performed poorly, and that the member should consider moving their interest into a different fund,” it said.

“The notification gives details of the test applied to determine the product’s underperformance, and also provides beneficiaries with information on how to change to a superannuation product that may perform better than the current product they hold.

“The notification also directs beneficiaries to the YourSuper comparison tool for information on products that have met the requirements of the performance test. 

“The notification includes standard words covering questions and answers on why the member has received the notification, and how poor performance of a superannuation product can negatively affect their retirement income.”

Prior to members receiving the written notification from their superannuation fund, those that thought to visit the fund’s website might have noted it contained a post declaring earlier failures.

Where a product does not pass the performance test for the first time, the registrable super entity (RSE) licensee must ensure that a description of the circumstances is made available on the RSE’s publicly available website. The RSE licensee must also take this step where the product has failed the performance test previously, but it is not the product’s second consecutive failure, in which case the product is closed to new members. 

The purpose of this requirement is to warn prospective beneficiaries when a product (which remains open) has been assessed as underperforming in the latest financial year.

There is no need for this information to be published on the website if the product is closed to new beneficiaries (as a consequences of two consecutive fails) as there cannot be prospective beneficiaries to warn because the product is closed to new members.
The explanatory memorandum makes clear that the possibility exists of funds being reopened to new members if it subsequently passes a performance test.

“APRA may make a determination for a product to reopen to accept new beneficiaries, if the product passes the annual performance test in a subsequent financial year,” it said.

The question is, however, how many people would want to join a superannuation fund which has been publicly identified as having failed its performance test? 

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