Super performance test needs trial run period

The Government’s Your Future, Your Super superannuation performance test should have a ‘trial run’ period of two years and should not rely only on a single metric, according to the Association of Superannuation Funds of Australia (ASFA).  

In a submission to Treasury, ASFA said it had “serious concerns” that the proposed performance test would have unintended consequences that would drive investment decision-making that would be contrary to the objective of delivering good member outcomes over the medium to long-term. 

“Given the seriousness of the consequences of the ‘performance’ test, the proposed test will drive trustees to make investment decisions effectively to ‘hug the index’, in conflict with the objective of delivering good member outcomes,” the submission said. 

ASFA said as there were concerns about the consequence of failure and the risk of unintended consequences in the outworking of the test, there should be a trial run period of two years. 

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“During the ‘trial-run’ period the test would still apply but the consequences for a product that did not meet the benchmark would not be triggered, instead, a trustee effectively would be ‘put on notice’ as to the product’s performance. This would provide the opportunity for an orderly transition through a mechanism such as a successor fund transfer, which would be in the best interests of fund members,” ASFA said. 

“This would also allow the performance test to be refined if necessary – the very fact that the performance benchmark test is prescribed in the regulations, as opposed to being in the Bill, speaks to a need for flexibility to refine the test over time.  

“This would also have the added benefit of allowing performance to be measured over a 10-year period, which would be a more appropriate period than the current eight year period prescribed in the regulations.” 

ASFA noted it questioned whether the benchmark approach was potentially in conflict with members’ best interests and member outcomes as it measured the returns of assets in a particular class against the index, rather than considering the strategic asset allocation or risk of the investment portfolio underlying the product.  

“The best measure of whether an investment is in members’ best interests and produces good outcomes for members is the long-term risk-adjusted investment performance. ASFA therefore recommends that the performance test not rely on a single metric,” it said.