Govt warned super performance tests will skew investments

The Government’s proposed member outcomes test will place superannuation funds at risk of being forced to make investment decisions where short-termism is the over-riding imperative and which are not necessarily in the best interests of their members over the medium to long-term.

What is more, the Government has been warned that impact of fees deducted from members’ accounts need to be given a weighting equal to investment performance.

The Association of Superannuation Funds of Australia (ASFA), representing both industry and retail funds, is so concerned about the Government’s performance test measures that it is arguing that the proposed new regime be trialled for two years to reduce the likelihood of it generating significant unintended consequences.

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However in terms of the potential negative impact on investment decisions, it has told Treasury that there is a significant risk that funds will seek to cling to the perceived safety of short-term outcomes rather than looking to achieve better medium to long-term outcomes.

“The conflict between these two competing ‘tests’ can be encapsulated in a scenario – a trustee has to decide between two investments:

  • One is likely to have better medium to long term returns, aligning with producing good member outcomes, but has higher volatility and risk of lower/negative returns in the short term
  • The other is likely to produce lower returns, with lower risk, but has a higher chance of enabling the product to meet the ‘performance benchmark’ in the short term.

“Which investment is considered to be the ‘correct’ decision for the trustee to make?” ASFA asked.

“Given the concerns about the potential operation of the proposed underperformance test, the significance of the consequences of failure and the risk of there being unintended consequences in the outworking of the performance test, ASFA submits that that consideration should be given to there being a ‘trial run’ for a two year period, during which the benchmarking would operate but the consequences for a product that did not meet the benchmark would not be deployed,” it said.

“Instead, a trustee would effectively be ‘put on notice’ as to the product’s performance, which would provide the opportunity for an orderly transition through a mechanism such as a successor fund transfer.

“Facilitating an orderly transition would be in the interests of fund members – by way of contrast the mechanisms proposed in the exposure draft legislation are likely to have undesirable consequences for members’ benefits. This would allow the performance test and/or benchmark methodology to be refined if necessary, and will have the added benefit of measuring performance over a ten year period.”

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When Rob Ferguson, Mike Crivelli and Olef Rahn established Pendal /. BT in the late 1970's, their investment strategy philosophy was dominated by the view that 'the long term is made up of a series of (good) short term performance results'. It worked - brilliantly. It culminated in the enormous success they had in the 1987 Crash when their super fund portfolios largely escaped the market downturn. But it was different then - the investment industry was dominated by actuaries in life companies whose philosophy was mainly about outperforming long-term inflation. Today, I think that both philosophies operate in the super fund industry but as a general observation, the short-term winners do not last the distance. Their increased weight of money, increasing responsibility to Members and the lack of spark / tired-ness of their investment managers turns them into long-term managers when different techniques are used to maintain good results.

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