Performance test failure should not hold back merger potential

Failure in the Your Future, Your Super (YFYS) performance test might make a fund less attractive but not completely unattractive for merging potential, according to asset consulting firm Frontier.

David Carruthers, Frontier head of member solutions, said it was obvious that a superannuation fund was underperforming and the YFYS test was not the best measure.

“The Your Future, Your Super test is not a full measure of underperformance, it’s a partial test of underperformance, but nonetheless the funds have been tarred with that brush,” Carruthers said.

“It’s obvious to see why a fund that has failed the test might want to merge into one that has passed the test. There’s more clarity on how the performance of the combined entity will work, [the Australian Prudential Regulation Authority] APRA has come out with some details on that.

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“You need to pay key attention so the fund which is taking over the failed fund will want to keep their performance intact, but does a bigger entity make more sense?

“A failure of the test doesn’t make a fund unattractive, it might make them slightly less attractive.”

When it came to the merger, Carruthers said funds that started earlier and had greater clarity found the process went more smoothly.

“We’ve been through a number of mergers with our clients and we think the earlier these things are looked at, the better,” Carruthers said.

When it came to reasons a merger fell through, it was hard to generalise, but alignment was the biggest cause.

“You go into these things saying ‘yeah, we have some alignment’ but the further it goes down the track then maybe there’s less alignment, but that’s a really general comment,” Carruthers said.

There were 13 products that failed the inaugural YFYS performance test, out of the 76 MySuper funds tested.