The Your Future Your Super (YFYS) superannuation performance test ignores actual returns, does not incorporate most risk adjusted improvements from diversified exposures, and excludes administration fees, according to Frontier.
In its submission to the YFYS reform consultation, Frontier said that, while the Government’s goal was to hold funds to account for underperformance, its reform would allow funds to underperform for seven to eight years before action, and the performance test was not directly related to members’ outcomes.
This would allow funds to gouge members on administration fees and be detrimental to disengaged members.
Specifically, Frontier said the performance test:
- Assessed how well a fund had implemented its chosen strategy, not whether it was a good strategy;
- Ignored actual returns and the CPI+ objectives of funds that reflected long-term member outcomes;
- Did not incorporate most risk adjusted improvements for more diversified exposures;
- Was not a peer relative assessment of underperformance; and
- Excluded administration fees, which had meaningful impact on members’ outcomes.
“Funds will need to work out how to consider this test alongside existing investment objectives and in the context of their investment philosophy,” Frontier said.
“As the test represents a new regulatory risk, a key step is understanding how portfolios are positioned relative to this new benchmark.
“As the test only captures part of the investment strategy, is assessed over a shorter timeframe than existing objectives, and the listed benchmark selection for some asset classes embeds a higher risk into the benchmark, there is a likelihood that portfolios well positioned to meet their long-term objectives and member needs could underperform the test from time to time.”
The submission said the performance test and a comparison tool could better meet the policy with enhancements including:
- Ensuring the performance test and the comparison tool are aligned, so consumers do not receive conflicting information;
- As the test with the greatest consequence of failure, we believe the performance test should be the most comprehensive assessment. A single test made up of a well-designed collection of multiple metrics is likely to be more effective and reliable than a single metric based on a narrow assessment of quality;
- As MySuper products are meant to be simple and low-cost, we believe both investment and administration all fees should be included. This is in line with the Productivity Commission (PC) analysis;
- In line with the PC recommendation, we believe that APRA should play a key role in working with funds which failure the performance test to improve or exit. This should provide more timely protection for consumers rather than relying on member engagement;
- Many funds invest in unlisted assets for diversification and risk-reduction, rather than additional returns. Better recognise these risk-reducing benefits by using blended benchmarks; and
- In line with the PC recommendation, we believe that the performance test and comparison tool should apply to all investment options, rather than just MySuper options.