ISA accuses funds of gaming YFYS test

Industry Super Australia (ISA) has accused poorly-performing superannuation of gaming the Your Future, Your Super performance test to boost their test score.

The association said analysis of the test results showed poorly-performing funds were trying to boost their score by shifting assets to categories with lower-return benchmarks and by exploiting a fee loophole that boosted their test score without a reduction in fees or increase in investment returns.

Prior to the inaugural 2021 benchmark test, 35 funds reclassified investment assets, many reduced exposures to ‘other’ assets with a higher 5.1% benchmark while increasing exposure to the lower benchmarked fixed income (1.8%) asset class and cash. 

Other funds reduced administration fees while hiking other charges which allowed them to improve their test outcome by an average of 0.06% overall yet increased scores of corporate MySuper products by 0.10% and 0.20% for retail MySuper products on average.  

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There were 13 funds which decreased administration fees with either no change or an increase in total charges, ISA said.

ISA called for a re-designed assessment which measured funds against a constructed portfolio of shares, fixed interest and cash.

“The test methodology should change to a simple naïve benchmark, which would end test manipulation by measuring what value trustees make for their members above a simply constructed portfolio. This would also measure performance in easy-to-understand dollar values rather than percentage points,” it said.

It created a benchmark of 70% equities and 30% fixed income and cash assets for a member with a $50,000 balance and found outcomes at member levels varied from a loss of almost $7,000 to a gain of $17,600 over eight years.

ISA also suggested funds which repeatedly failed the test were closed and members transferred to a new fund, members should only be stapled to a fund which had passed the test and including a ‘exceeds benchmark’ score alongside pass and fail.

Industry Super Australia deputy chief executive, Matt Linden, said: “This assessment has allowed too many dud funds to bend the rules, so they pass, leaving their members with the same lousy returns and high fees.”   

“While some funds cut fees to pass the test, many of them are still delivering poor returns to their members.”

“Performance testing is a good thing, but to unlock its full potential funds should be measured on what value they are adding to their members retirements – not how they can game the system.”