Government’s decision to take on the role of supervisor for the superannuation industry is likely to result in worse outcomes for members, experts believe, but is in line with policy advising shifting into ministerial hands and away from government specialist agencies such as APRA.
The latest performance test announced in the Federal Budget requiring MySuper products to inform members if they fail an asset allocation benchmark by more than 50 basis points over an eight-year performance window from July, and prohibiting those funds from enrolling new members if they fail the test the following year, has been widely panned by experts including top tier asset consultants, academics and independent researchers.
These experts have described the government’s Your Future, Your Super performance measurement as overly simplistic and likely to result in poorer diversification within asset classes as well as a favouring of listed investments and passive strategies.
The design of the new performance measure was derived but subsequently detached from the ongoing work the Australian Prudential Regularity Authority has been doing in recent years, policy watchers have observed.
The new performance measure is but one single metric taken from the APRA heatmap framework which also considers investment risk taken and allocation across asset classes. Consideration of investment risk taken and allocation across asset classes is considered more germane to investment performance than is investment implementation, the experts have outlined.
‘Doing APRA’s job’
The decision by government to cherry pick from the APRA methodology was an outcome guided by Treasury without consultation, as reported by Investment Magazine. The consultation for the heatmap methodology was separately based on the Productivity Commission inquiry which opened consultation from industry stakeholders including APRA in 2017.
“It’s is doing APRA’s job for it but in a very crude and unsophisticated way,” said Scott Donald, director of UNSW’s Centre for Law, Markets and Regulation said of the creation of the government’s new performance benchmark.
“If you really want to discipline underperforming funds you’d be better off asking APRA to do that, maybe based on similar criteria but with a capacity to try to look behind the numbers and work out what’s causing the underperformance rather than hitting it with a sledge hammer and hoping that what’s left makes sense,” Donald, who published a detailed critique of the benchmark on Friday, said.
The role of Treasury in the creation of the government’s new benchmark was likely limited to presenting government with a series of options to select from rather than the provision of any kind of independent guidance relating to the broader public interest, a former senior staffer at Treasury who made the observation of the condition of anonymity.
“Treasury’s role is to serve the govt of the day, it’s not there to serve some kind of independent view of the public interest and it only has power if it works with the government of the day,” this person characterised.
Broadly, experts in retirement income policy pointed out that government might feel justified to take on more decisions where expert agencies might be better equipped in light of the shortcomings in APRA and ASIC’s ability to regulate an industry it was too close to as revealed by the Hayne royal commission.
Treasury: Enabler, not influencer
Treasury was contacted but a request for comment was referred to Treasurer Josh Frydenberg’s office. A spokesperson for Frydenberg declined to comment on the process to create the new performance measure beyond some general guidance on background. Subsequent requests for comment regarding the SAA benchmark have since been ignored.
The retirement income policy division of Department of Treasury is headed by Robert Jeremenko; Robb Preston and Ben Dolman are listed as senior advisers. Jeremenko started his career at National Australia Bank in government affairs and after a stint at the Tax Institute worked in the Office of the Treasurer under then Liberal Party MP Hon Joe Hockey and then as the Chief of Staff, Tax White Paper during Scott Morrison’s time as Treasurer before joining Treasury at the end of 2016 and taking the role as head of the retirement income policy division in July 2017.
The role of Treasury as an enabler rather than an influencer of policy direction is in line with the shift of policy influence in recent years from Treasury to the ministers’ offices, Paul Tilley (pictured), a former economic adviser to governments who worked at senior levels in all parts of Treasury and who is now a senior fellow at the Melbourne Law School.
In his book entitled Changing Fortunes, a history of the Australian Treasury, Tilley described how Treasury has been dragged into the political fray of the last decade and become more of an information provider for governments in those battles.
“A relentless push for greater responsiveness combined with a deteriorating political scene dragged Treasury into a relationship where, when it mattered, policy advice was often not provided. Treasury’s resources were increasingly being used to provide factual information to help in the daily political skirmishes,” Tilley said.
“Of great concern was the fact that the balance of policy advising was shifting to the ministerial offices, where issues were seen more through a political lens,” he said.
Tilley offered his view of Treasury and the shifting of influence away from public service more broadly and into ministers’ offices in the historical context and not specifically in relation to superannuation policy and the performance measurement of funds.
Interventionalist government
Investment consultant Jana has been among the most prominent critics of the government’s new performance benchmark with the industry’s other three large asset consultants believed to have started building evidence in the background to discredit the measure which is supposed to apply to MySuper products from July next year and to superannuation schemes more broadly from July 2022.
“The government approach is heavy-handed, interventionist and ignores that natural market forces and regulatory changes over the last 20 years have resulted in heightened competition, consolidation and pressure to maintain strong member outcomes,” Matthew Griffith, Jana’s principal consultant noted in a scathing critique last week.
Griffith’s critique centred on the likelihood the benchmark would result in “index relatively mediocrity” which he emphasised is not in members’ best interests.
“This performance metric may create a number of unintended consequences such as gaming and managing performance metric risk, rather than managing the risks to their member’s retirement outcomes,” David Bell, executive director of the Conexus Institute said.
“Importantly it misses the through-time changes made by funds to improve future performance. I’m sure APRA is actively providing feedback to underwhelming funds and would have insight into the improvements that underperforming funds have made. I can’t understand why APRA’s activities are not somehow being incorporated into the test,” Bell said.
He added the benchmark also misses important elements such as the total amount of investment risk taken and allocation across asset classes, both of which could be larger drivers of performance than implementation performance which it actually tests.
This is what happens when governments are allowed to keep growing without checks and balances. To justify their expansion, they’ll keep looking for things to fiddle with and their dumbest ideas will somehow be implemented to the detriment of all.