Superannuation funds preoccupied with the Your Future, Your Super performance test need to consider more holistic retirement outcomes and benefits for their members, according to Mercer.
Mercer Super head, Tim Barber, said the performance test honed in on investment, performance, and fees but that this was a narrow view of super.
“It’s about overall retirement outcomes for members of funds and there’s more to it than just performance and fees. There’s other things like insurance in super that is not captured in the terms and benefits, or cost perspective that is part of the test,” he said.
“There’s other components of the superannuation offering like the services that members get along the way this can include advice around what are the best options and superannuation funds policies, options, choice within a fund, and that type of service is important component as well.
“Then there’s the member service experience such as engagement with a mobile app or digital forms, and so on.”
Barber said as the test was focused on performance and fees, other areas could be ignored or forgotten to a certain extent and that was an unintended consequence.
“Funds that are therefore preoccupied with the fees component and aren’t looking at those more holistic retirement outcomes and benefits need to be considering those for their members,” he said.
Barber noted that members in lifecycle investment options were disadvantaged in a pure performance test when equity markets ran hot as they would be measured against an artificial benchmark compared to other funds that had more equity risk exposure and would therefore in a relative sense underperform.
“That's a nuance, for example, where you can get some odd, odd outcomes. I think that's something that's invisible to the public as they look at the performance test as it currently is,” he said.
Benchmark hugging, Barber said, was a dangerous consequence of the test and disincentivised funds from making decisions in members’ best interests.
“You can see why some funds may need to do that, because the consequences of failing the performance test are catastrophic from the funds point of view, and therefore are they actually being incentivized to do what's in the very best interest of their members?” he said.
“Funds should be doing what's in the best interest of the members, they should be managing the portfolio with that in mind. But the performance test certainly provides the potential for that to be to be a disincentive to be putting the members interests at the forefront. That's a dangerous circumstance for sure.”