Failed YFYS funds need to be in ‘crisis mode’

Most of the 13 superannuation funds that failed the Your Future, Your Super (YFYS) performance test will not recover and they should be in “crisis mode”, according to a panel.

Speaking at the Australian Institute of Superannuation Trustees (AIST) Superannuation Investment Conference, Parametric manager for research and strategy, Whitlam Zhang said looking back to the prudential regulator’s introduction of their super heatmaps, of the underperforming funds that were identified, 47 no longer existed.

“It's not hard to imagine that Your Future, Your Super, probably will have a similar effect,” he said.

“For the underperforming funds, they don't really have the luxury of time. The Australian Prudential Regulation Authority (APRA) has given them until the end of the year to come up with their plans and so they'll need to make some pretty difficult decisions soon.

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“Crisis mode really means spending a lot of time figuring out what options they have between now and the end of the year. So, if they want to look at mergers, looking at what merger partners might make sense.

“The regulator is expecting trustees to figure out what to include as part of their contingency plans but that comes at a cost because all the time that's now spent on responding to Your Future, Your Super could have been spent on actually running the fund.”

Zhang said funds would be thinking about how to adapt their investment strategies to the YFYS environment, and how they thought about their risk budgets as the test penalised funds for taking active risk.

He said funds looking to minimise the risk of failing the test would potentially aggressively dial down the amount of active risk in their fund and that would impact the level of future returns the funds could expect.

Zhang said funds would also continue to look for opportunities to lower their fees but there were concerns about going too far.

“Where does cost cutting actually result in the possible detriment of member outcomes? What if, for instance, a fund couldn't hire the staff they need to either implement their portfolios effectively, or deliver quality advice to their members. This is just something that we just got to be very careful about, so that we don't end up with a race to the bottom,” he said.

Zhang noted that no funds was immune to the test and could become a deep rabbit hole that could consume huge amounts of time for already busy teams and would serve as a distraction.