Super fund comparability ahead of retirement
Ask anyone on the street if they are confident to compare super funds and you’ll likely have them scratching their heads. For our industry to rebuild trust and become more transparent, we need a better way for all Australians to compare super funds, so they can cut through the ‘noise’.
That’s why AMP is welcoming the Australian Prudential Regulation Authority’s (APRA’s) moves to overhaul the way superannuation data is collected and reported. As an industry we need a better system to help Australians more effectively compare products based on key indicators such as returns, fees and importantly, their appetite for and ability to withstand risk.
Currently, Australians are forced to calculate and compare their superannuation based on obscure industry measures, such as unit pricing, to benchmark their fund against the market. Furthermore, consumers can’t rely on government comparisons because the data is inconsistent and inadequate.
APRA’s decision to move to a simpler and more consumer-friendly traffic light system or heat map will potentially give super funds a rating of green, amber or red based on returns, insurance, fees and fund sustainability. This is good news for consumers if it helps arm them with the right information to help assess how their fund is performing in an easily accessible format. While we haven’t yet seen the detail, we support the intent of making super easier to compare, and look forward to contributing to discussions when more detail is released.
However, it won’t be an easy task. Currently, all funds are required to publish the investment risk of each fund under APRA product dashboard reporting requirements. This is one measure, and on its own, is not likely to be understood by members and needs greater understanding and effectiveness for making comparisons. Particularly given the measure itself is based on the probability of loss, rather than the size of loss, and is not used by managers as genuine indicator of risk.
Beyond this, many funds appear ranked based on returns and fees alone – and while both incredibly important measures – comprehensive comparisons will require APRA to take risk into account. At present, many members rely on fund labels such as “balanced” to inform their judgement, without realising that the underlying risk in these funds can be quite different.
While it might be appropriate for someone in their twenties, who is able to ride out the highs and lows of the market, to concentrate on returns and fees alone; steering someone in retirement or towards the end of their working life to a product that may have high returns, but carries significant risk, could be disastrous in the event of a downturn. This is especially the case when they have a limited horizon in which to recoup those losses, while they simultaneously draw down on their remaining balance to fund retirement.
People need to be able to understand what risk their fund is taking. The greater the transparency, the better placed consumers are to make an informed decision. One thing for certain is that markets rise and fall, and you don’t want to get caught at the tail end of a downward cycle. A fund that is rated “green” will be considered an endorsement, so the methodology must be appropriate for the members’ needs.
Currently, there are no standard guidelines for classification of growth and defensive assets in superannuation. This makes it particularly difficult for consumers to make apples with apples comparisons when trying to assess performance in line with risk.
We are seeing an increasing number of industry and retail funds investing in unlisted property and infrastructure labelling the investments as defensive.
In recent times these investments have performed well, boosting returns for the funds. But there is no doubt they lack transparency, and in the event of a downturn they may carry considerable risk.
APRA needs to come up with a system to accurately compare funds – risk should be firmly on the table and reflected in the comparisons. We acknowledge that this is not an easy task for APRA, given the industry itself has debated with this issue for some time.
As an industry we must all start working together to find and agree to the right methodology that makes it easier for Australians to accurately compare their super products. We’re not there yet.
These issues are still being debated by the industry. AMP will contribute to APRA’s consultation process and will support an outcome that genuinely serves to ensure
Australians can choose the right fund for their individual situation.
As an industry, we need to reduce complexity and show we genuinely have our members’ best interests at heart. We have been debating the quality of data and difficulty in comparing super for years. The time has come to get it right, and the right measure will keep the industry accountable.
Alex Wade is chief executive officer, Australian Wealth Management at AMP.