YFYS test spurs funds to review their investment menus

Trustees could soon favour consolidation of products in their investment menus as they face increased performance scrutiny by the prudential regulator, opting to offer fewer but more focused Choice products for their fund members. 

In August, the Australian Prudential Regulation Authority (APRA) announced 96 trustee directed products and one MySuper product failed to meet the benchmark of its 2023 superannuation performance test.

It was the first year to the performance of 805 trustee directed products, a subset of the Choice sector.

Some 96 trustee directed products failed to meet the test benchmarks, which included 20 of 500 non-platform products and 76 of 305 platform products.

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Reflecting on the results, Kathy Neilson, financial services lawyer and partner at Piper Alderman, admitted the sheer number of products that failed the Your Future, Your Super (YFYS) test was surprising.

“I thought there was definitely going to be more [platform and trustee directed products] than the number of MySuper products that might fail the test, but it was a lot, especially because it was coming for a long time,” she told Super Review.

“I think [the YFYS test] is going to lead to consolidation of Choice products because there’s just so many.”

Neilson observed three-quarters of the failed trustee directed products were concentrated in products offered by only four trustees: N. M. Superannuation Proprietary Limited, Nulis Nominees (Australia) Limited, Oasis Fund Management Limited, and OnePath Custodians Pty Limited.

In addition, one MySuper product, AMG Super, failed to meet the test benchmarks out of the 64 MySuper products assessed, compared to the five that failed in the previous year. 

“Those trustees are all going to wonder if there should be consolidation of their products. There’s probably a lot of people that have been in products for a long time that haven’t really thought about moving,” she said.

“And if trustees have a lot of products, particularly trustees that have undergone a lot of consolidation, either mergers or successor fund transfers (SFTs), it’s a lot to manage.”

According to JP Morgan’s latest Future of Superannuation report, there were 137 funds in March 2023 compared to 174 in September 2021, a reduction of 37 funds either from merging or closing.

Since the start of 2022, there have been at least 13 super mergers such as Hostplus acquiring both Statewide Super and Maritime Super and HESTA acquiring Mercy Super.

The largest merger has been between QSuper and Sunsuper to create Australian Retirement Trust (ART) in February 2022. Notably, the fund’s QSuper Socially Responsible was among the 20 non-platform products to fail the 2023 YFYS test, alongside three products from Crescent Wealth, five products from OneSuper, and three from ClearView Retirement Plan. 

Neilson said the law firm had been told trustees were becoming conscious of having a wide suite of investment options.

“The test is something that’s going to happen year on year, the cost of administering all the products is really large, and the members’ best financial interest consideration, which is relatively new as well, is going to lead people to think about: do we really need all these investment options or separate products? Or are we better off rationalising down to something more manageable?” she said. 

Kirby Rappell, executive director at SuperRatings, said the research house has already observed a trend of some rationalisation of superannuation investment menus over the past 12 months.

“I do think the performance test has triggered funds to review their offerings and reflect on what is an appropriate level of choice,” Rappell agreed.

“Funds are seeking to balance the costs and benefits of choice to determine an appropriate level of choice for members. I think the testing regime has provided an opportunity for funds to reflect on both the benefits and costs of choice.”

He believes the number of investment choice will likely remain around 12 options.

“It means that the days where there were say 100+ investment options is likely gone, with the exception of platforms where people are seeking the most choice,” he told Super Review. 

“Funds are likely to offer a range of diversified and single sector options, coupled with a sustainable-style option and potentially a low-cost passive option. Some funds will offer more but this seems to be the most common combination at present.”

Rappell hopes this trend of rationalisation means that funds’ best offering is being put forward from a risk/return perspective and that fees are as sharp as possible, however, it is not a one-sided equation. 

He explained: “There is less incentive for innovation in our opinion and this has been a hallmark of the system over the years, and we need to ensure this is not lost. A good example has been retirement-focused offerings that were more tailored for pre-retirees. These approaches have often not been compatible with the current environment where options have wider asset allocation bands or highly tactical asset allocation approaches. 

“As the system grows and matures, we think that the industry needs to be extremely focused on driving innovation within appropriate guardrails.”