Super performance test not sound for purpose

There are fundamental problems with some of the key proposed regulations for the Your Future, Your Super (YFYS) reforms, including the super underperformance test, according to the Actuaries Institute. 

The institute supported the intent of the regulations, but said it believed the proposed performance test was not sound for its intended purpose. 

“The test may, in some cases, be to the substantial long-term detriment of members,” it said in its submission to Treasury on the YFYS bill. 

Tim Jenkins, convenor of the Institute’s superannuation practice committee, said the performance test failed the pub test. 

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“Asset allocation is the largest driver of total net returns, yet is disregarded by the test,” Jenkins said. 

“The proposed test narrowly focuses on how a trustee has implemented an investment option’s disclosed asset allocation, not on member outcomes.  

“As a result, the proposed performance test leads to some concerning results, including an investment option with top quartile net returns potentially failing the test. 

“Or two investment options having the same overall risk profile and identical net returns after fees yet one passes the test, and the other fails.” 

The institute was also concerned the basic nature of the Your Super comparison tool in the draft regulations would potentially lead to inappropriate consumer choices, as this might also meant members inadvertently lose valuable insurance in superannuation benefits. 

It also said the difference in net returns between investment options with the same risk profile and same test result can exceed 1% pa, which was a substantial difference to eventual member outcomes.  

“Trustees will need to manage the risk of failing the test, potentially leading to worse member outcomes,” Jenkins said. 

“The test may also lead to large outflows in the short term, causing liquidity issues and lowering returns for members of affected funds. 

“There are also insurance implications for super fund members that the proposed reforms do not recognise.”  

 In its submission to Treasury on the YFYS bill, the institute: 

• Recommended the introduction of the performance test be deferred; 
• If there was no deferral, it recommended that transitional arrangements should apply to protect member outcomes; and 
• Highlighted there must be greater focus on the value of insurance in super in order to protect members. The performance test also relied on the accuracy of information reported to APRA. 

“APRA [Australian Prudential Regulation Authority] has said it needs to significantly enhance the comparability and consistency of reported data,” Jenkins said. 

“While the quality of data is improving, there remain questions over the reliability of historically reported data, particularly for older periods, for administration fees and strategic asset allocation.   

“There are major implications for the integrity of the test until these historic data issues are addressed. 

“The ramifications of failing the performance test need to be proportional to its reliability and impact on member outcomes. 

“There are significant consequences for a product and its members which fails the test, including sudden large outflows that create liquidity issues and adverse member outcomes, particularly to the disadvantage of remaining members.”