25 funds likely to fail new performance test, analysis shows

Twenty-five superannuation funds are at risk of failing the government’s new SAA benchmark test, with some staring down the possible loss of their default fund status, an analysis of public  Australian Prudential Regulation Authority data shows. 

Of the 90 MySuper funds available on APRA’s performance heatmap, 25 are currently underperforming benchmark similar to the one set out by the government in the Federal Budget by more than 50 basis points.

[Editor’s note: this analysis relies on APRA data as at June 2019 which is the most up to date publicly available data released by APRA.]

These funds – listed below alphabetically – are currently underperforming APRA’s net investment return relative to listed SAA Benchmark Portfolio over five years, which is one of the metrics in APRA’s Heatmap. This metric is very similar to the government’s new proposed performance test which is assessed over 8 year periods.

The failing funds range in size from Perpetual’s Select Superannuation Fund, to AGM Super to Commonwealth Bank Super, and include both industry and retail funds.

The new performance test, outlined in the government’s Your Super, Your Future document, will measure super fund performance from July and will prohibit those funds from enrolling new members the following year should they fail the test again.  

Stapled underperformer  

One fund is REST Super, which has suffered a 0.68 per cent underperformance over the last five years relative to the Listed SAA Benchmark Portfolio, and is one of the few traditional industry funds to appear on the list. 

Despite the underperformance, REST stands to be one of the major beneficiaries of the government’s new benchmark test, thanks to the ‘stapling’ changes as part of Treasurer Josh Frydenberg’s latest proposed super reforms. 

The changes allow members who switch jobs to take their ‘stapled’ super accounts with them, avoiding automatically generated new funds and reducing the occurrence of multiple low-balance accounts. 

As a major hospitality and entertainment super fund, REST captures the vast majority of its members from school-leavers entering the workforce and other casual labour market participants, increasing its likelihood of ‘stapling’ as workers move between jobs.

Eighty-six per cent of REST members joined the fund by default when they started with an employer, according to CoreData’s Super Brand Research. And as of June 2019, one third of REST’s members are aged below 25-years-old and 63 per cent are aged below 34, according to the latest APRA fund level data. 

However, should REST’s poor performance continue over the next few years, it could be blocked from taking on new members and lose its default status as part of the government’s penalties on underperformance.

Funds that have underperformed over eight years will be required to communicate with members outlining their poor performance and offer them access to information regarding new funds.

Herd approach

While the industry has broadly welcomed ways to identify and minimise underperforming funds, on Wednesday the Association of Superannuation Funds of Australia criticised the government’s new plan, saying this measure of investment performance will drive a herd approach to asset allocation and encourage short termism. 

“The proposed measure is likely to significantly reduce the flow of super capital into alternative investments such as infrastructure, private equity, venture capital, hedge funds, fintech start-ups and credit as funds feel compelled to hug the index,” ASFA said in a statement. 

REST, for example, may need to overhaul its investment strategy to hold the same assets that drive performance in the government’s benchmark. 

Using just one listed-asset metric to assess fund performance has been widely criticised elsewhere, with experts arguing funds with active management or unlisted investment approaches may struggle to beat the government’s benchmark which makes little provision for these strategies. 

As such, experts warn many funds may be forced to reorient their strategy towards passive and listed strategies and create a homogenous investment landscape that dampen results for members. 

List of current underperformers (alpahabetical)

The following funds have underperformed APRA’s net investment return relative to listed SAA Benchmark Portfolio over five years, one of the metrics in APRA’s Heatmap. This metric is very similar to the government’s new proposed performance test which is assessed over 8 year periods.

Source: APRA data at June 2019