Industry reacts to Government's YFYS performance test concerns

Treasurer Jim Chalmers has announced the government will soon consult to improve the superannuation performance test amid claims that it disincentives sustainable investment from funds.

In the Treasurer’s third investor roundtable on 5 December, some of Australia’s largest investors representing more than $2.5 trillion in capital were present to discuss various issues.

Reforming the Your Future, Your Super (YFYS) performance test was one of the key roundtable outcomes.

“The government will consult on options to improve the superannuation performance test so that trustees are held to account for member outcomes without holding back investment in economic priorities such as the net zero transformation and housing,” Chalmers’ statement wrote.

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While the test has enhanced super fund’s investment performance, the Treasurer noted concerns that it may be discouraging investment in asset classes that strengthen the economy – namely, the net zero transition.

“A consultation paper canvassing options to address these issues will be released soon.”

In The Responsible Investment Super Study 2023 released on Monday (4 December), the Responsible Investment Association Australasia (RIAA) expressed these concerns.

“RIAA is still concerned that the way the YFYS performance test is currently structured will disincentivise long-term sustainable investment approaches such as funds shifting their investments towards net zero commitments and reduced emissions. We continue to engage constructively with Treasury on a solution,” it said.

Industry response

Blake Briggs, chief executive of the Financial Services Council (FSC), said: “There should be a high bar to further changes to the superannuation performance test as regular changes come at a cost for consumers as trustees re-evaluate and adjust their investment strategies relative to the new benchmarks,” he said.

Briggs emphasised the test’s successful results, with 17 MySuper products exiting the market by merging with another fund. 

This has resulted in the transfer of $75.5 billion in retirement savings to higher performing products across 1.4 million member accounts since the first test in 2021.

“The case for material consumer benefits in addition to the broader economic benefits to Australia should be clear before further changes are implemented to offset the inherent transition costs of further tinkering,” Briggs warned.

The CEO added that the consultation will offer an opportunity to address known methodological issues and regulatory barriers to product modernisation, since YFYS began testing trustee-directed products this year.

The FSC previously called for modernisation in super development last month. According to the body, removing barriers for funds to transition to modern investment products would result in members retiring with cumulatively $16 billion more by 2050.

Edwina Maloney, group executive of platforms at AMP, has also said the performance test is not fit for purpose.

“Firstly, not all investment options are included in the test. The current test only includes trustee directed products - a very small subset of funds that are recommended by a financial adviser - and does not apply to the plethora of diversified investment options that are available on platforms (known as 'externally directed products'),” she commented.

She believes the test’s “one size fits all” methodology deserves more scrutiny due to differing fees and returns depending on the product.

“The annual performance test ignores the fact that individuals have very different financial goals or needs. 

“AMP continues to urge the government to reconsider the test methodology for wraps, to improve transparency and, in particular, address the immediate issue of providing capital gains tax relief for members having to exit products which haven’t met their APT benchmark,” Maloney said.