The Australian Prudential Regulation Authority (APRA) could effectively send superannuation funds to the wall through clumsy use of annual performance tests.
That is the warning delivered to the Senate Standing Committee on Economics, with the National Foundation for Australian Women warning that the test envisaged in the Government’s Your Future, Your Super legislation could make the failure of superannuation funds a “self-fulfilling prophecy”.
The submission said the difficulty with the Government’s proposal was that it depended on the parameters established in the test, which was to be administered by APRA.
“APRA will have flexibility in how the test is designed and applied. There is some scrutiny provided through the requirement that regulations must be tabled in Parliament.
“The regulations are expected to address the following matters:
- · specifying requirements in respect of investment returns (which may be net of fees and taxes); and
- · specifying requirements that depend on the exercise of a discretion by APRA; and
- · specifying matters that APRA may or must take into account in exercising such a discretion; and
- · allowing APRA to make specified assumptions in exercising such a discretion.”
“Failing this test will have major implications for a superannuation fund, as it will lead to members leaving that fund. The transfer of member accounts to other funds will further weaken the viability of the original superannuation fund: for example the fund may find it necessary to retain higher levels of cash holdings, which will contribute to a weak result in the subsequent year; rendering it unable to accept new members to rebuild its investment base,” the submission said.
“In short, a failure to meet benchmarks in one year could become a self-fulfilling prophesy with the fund continuing to perform badly until it fails. The outcome would be even more catastrophic for remaining members than the original underperformance. While well intentioned, the outcome of this measure will reduce competition and diversity in MySuper funds and other nominated products.”