The biggest problem with the government’s proposed superannuation performance test is the consequences of bettering or failing the benchmark are very asymmetric, according to Chant West.
The research house’s submission to the Your Future Your Super legislation said the test was “far too blunt” as the sole instrument used to weed out underperforming funds.
“The penalties for failure (likely termination of the fund) far outweigh the benefits for success (possibly gaining some more members), so this regime will inevitably lead funds towards risk-averse behaviour that’s likely to reduce longer-term returns,” it said.
Chant West noted the test would discourage the diversification that had characterised the best MySuper products and their precursors for decades.
“And it would discourage innovation in seeking out new sources of return, because the risks of new ideas not paying off would far outweigh the rewards. New sources of return will be particularly important given the challenges that some traditional asset classes face in coming years (especially defensive assets),” it said.
“For all these reasons, we believe the proposed use of the performance test would be detrimental to the super system, and not in the best interests of members.”
The submission suggested that underperforming funds should be required to engage in a rigorous review process with the Australian Prudential Regulation Authority (APRA) to determine their future.
“Funds would be required to demonstrate to APRA why they are able to provide improved member outcomes in the future. Part of this would be explaining reasons for their underperformance over the statutory period which may include improved performance in the months following the assessment (illustrating the end-point dependency of the assessment date), material changes to team structure or to the investment strategy/asset allocation during the assessment period, and significant market corrections or shocks that particularly impacted on their investment portfolio and are likely to turn around,” it said.
“In its assessment, APRA should have the flexibility to consider other matters beyond the statutory performance metric including performance over other periods, the quality and value of insurance and the provision of member services and advice, and the success of these initiatives in driving better outcomes for members.”