AIST and ISA urge action on underperforming Choice funds

The Australian Institute of Superannuation Trustees (AIST) and Industry Super Australia (ISA) have urged the regulator to help members of underperforming Choice funds after its heatmaps found one in five were significantly underperforming the benchmark. 

Data from the Australian Prudential Regulation Authority (APRA) found one in five Choice funds with an eight-year history had underperformed.

Of the 407 investment options measured in the heatmap, 182 underperformed and 80 significantly underperformed.

Compared to performance during 2021, this was an improvement, APRA said, as 2021 had seen one in four investment options significantly underperform.

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AIST urged that all Choice funds were included in the heatmaps — around 53 per cent of funds under management in Choice funds were excluded from the heatmaps currently.

AIST chief executive, Eva Scheerlinck, said: “We continue to call for the heatmap to cover all Choice accumulation products so members can compare the performance of their fund with other funds and make the decision, which is so critical for their retirement income, of whether to stay or leave.

“Given the results of the products covered in this heatmap, which account for less than one in every two dollars invested in Choice accumulation products, we can only imagine what horrors are hiding in the dark, untested and unexamined.”

ISA deputy chief executive, Matt Linden, added: “These heatmaps show once again that more needs to be done to connect members to high-quality super funds, closing products to new members is no punishment to many of these dud funds and in some cases is their business model.

“It is disappointing for members whose funds won’t face a performance test that they will continue to be kept in the dark and if these findings are anything to go by millions are most likely stuck in a dud Choice product.” 

ISA stated that for members who had been stapled to these products, this could cost each of them up to $230,000 at retirement in comparison to being a member of one of the top 10 MySuper products.

“In a compulsory system, disengaged members should not be left languishing in a dud super fund. The government needs to upgrade consumer protections, so members are only stapled to the best funds, who have passed the performance tests,” Linden said. 

Scheerlinck noted that, unlike MySuper funds where members defaulted into them, many Choice members were in those options at the suggestion of a financial adviser. Given such a high proportion were found to be underperforming, she said, it could be argued this was not in the members’ best financial interests.

Over an eight-year time horizon, 39 per cent of open Choice investment options fell below benchmark compared to 21 per cent of MySuper products. The figure was even higher for closed Choice options at 67 per cent.

“In these circumstances, APRA should direct a transfer of members to a better fund, as recommended by the Productivity Commission in its 2018 report on the Efficiency and Competitiveness of Superannuation, rather than require members to leave an underperforming fund,” Scheerlinck said.

“With billions of dollars of members’ retirement savings at stake, the time to act is sooner rather than later.”