Australia’s biggest superannuation fund says federal government plans to revamp performance testing will not resolve the issues with so-called index hugging and short-term investing that already plague the retirement savings system.
The 2021 Your Future, Your Super reforms included the Australian Prudential Regulation Authority publicly naming dud funds by measuring their performance against a range of benchmarks over an eight-year timeframe.
But experts complained the test was discouraging funds from investing in ways that did not follow indices or mirror other funds out of fear they would be deemed a poor performer.
Financial Services Minister Stephen Jones last month committed to adding more benchmarks and extending the timeline to 10 years following a government review.
But AustralianSuper says even with the changes members will continue to be short-changed and their retirement savings compromised unless there are further additions, including measuring all retirement products against a universal industry benchmark.
Because APRA uses asset class benchmarks, funds’ performance was only measured against their own investment choices rather than how well their overall strategy delivered returns, AustralianSuper said in a submission to Treasury in response to Mr Jones’ proposed changes.
This meant the test essentially only looked at securities selection rather than portfolio construction and asset allocation, despite securities selection being “generally the least important of the three aspects for generating net member returns”.
Adopting benchmarks that instead measured performance of equivalent products in the overall superannuation industry would be “more objective” and remove complexity, the submission said.
Many of the asset classes that are most profitable for industry funds and consistently responsible for their outperformance compared to their retail counterparts are difficult to benchmark accurately against market indices, as they are largely in unlisted assets.
The submission also pushed Treasury to expose all retirement income products to the test instead of the current approach of only judging default MySuper ones, warning that Australians may languish unaware in poor funds otherwise.
No exceptions
Mr Jones in April said that he planned to bring more choice products such as ESG-focused funds into the next round, but this will still exclude around a third of all funds under management in APRA-regulated super products.
“The measures still do not provide Australians with a complete picture of fund and product performance, to enable them to make informed choices regarding the fund which best suits their circumstances,” AustralianSuper’s submission said.
The super fund also urged the government to analyse funds’ fees on the same timeline as investments, rather than the current one-year approach.
The submission said this was “an inconsistency at the heart of the performance test” and may cause members to lose out if their super funds looked cheap annually but had not been historically.
There was no “compelling rationale” for analysing fees on a short-term timeline when superannuation was a long-term investment, it added. Industry funds typically charge significantly less than retail funds.
Experts have already predicted that ethical funds’ fees will plummet in the lead up to their first performance tests, as the same thing had happened with MySuper products.
AustralianSuper reiterated its “long” support of performance testing in general, however.
“Given the compulsory nature of Australia’s retirement system and the importance of funds acting in the best financial interests of members, we support measures that ensure only strong long-term performing funds receive Australians’ superannuation contributions,” the submission said.
