FSC/ASFA SRM process fundamentally flawed

The standard risk measure (SRM) process developed by the Financial Services Council (FSC) and the Association of Superannuation Funds Australia (ASFA) has some fundamental flaws and is a fair way from providing an accurate and comparable risk measure, according to a new report by SuperRatings.

SuperRatings conducted a performance survey based on the FSC/ASFA initiated risk measures, which were adopted by the majority of Australian super funds.

The intent was to classify the risk of all investment options within funds, ranging from ‘very low risk' to ‘high risk'.

After completing an analysis of over 500 diversified options, SuperRatings concluded the controversial SRM had not provided a complete answer, but had got the ball rolling in terms of ultimately creating a satisfactory risk measure for consumers - something SuperRatings said the industry had been unable to achieve in the last 10 years.

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The SRM initiative requires ongoing tweaking to eliminate some inconsistencies, the report said.

"If this is done, a viable consumer outcome is highly possible, if not probable within the next few years," the report stated. "However, right now, from a consumer perspective, the process has some fundamental flaws which means SRMs are still a fair way from providing an accurate and comparable risk measure."

The report found a significant range of options that end up in the same risk management grouping.

For example, the "medium" risk label picks up investment options with a low of 30 per cent in growth style assets right through to options with 100 per cent in growth style assets.

"The problem appears to lie with the ability of funds to self-select assumptions to be input in the modeling," SuperRatings said in a statement. "Whilst the self selection was forecast by many to be an issue, SuperRatings' analysis has for the first time clearly identified the problems with the outcomes."