Treasury did not seek input to develop its latest benchmark for identifying poor-performing superannuation funds outside of the views garnered through consultation the Productivity Commission’s opened three years ago, it is understood.

The benchmark, which funds are required to outperform by at least 50 basis points a year over an eight-year period or risk being cut off to new member funds, was taken directly from the one aspect of the APRA heatmaps methodology and not the subject of further discussion with industry since the Productivity Commission inquiry, it has been said.

The Productivity Commission inquiry led by Karen Chester – then the deputy chair and commissioner, now deputy chair and commissioner at ASIC – published its final report in January last year which highlighted inefficiencies and underperformance of funds and spun off APRA’s heatmap methodology.

A spokesperson for Treasurer Josh Frydenberg did not comment on whether the coalition government planned to consult on the new performance measure before it applies to MySuper funds from July 1, 2021. The performance test is slated to apply to all trustee-directed accumulation products outside of MySuper the following year.

Helen Rowell (pictured), APRA’s deputy chair, acknowledged the “major changes” foreshadowed by the Federal Budget which if passed by the parliament will “shine a brighter light on fund performance and trustees’ expenditure decisions” during an address to the Australian Institute of Superannuation Trustees Chairs Forum on Monday.

“While the sudden acceleration [in changes to superannuation] might be a surprise to some, the direction we are heading should not be; the industry has been on notice for years that chronic underperformers need to improve or hand the keys over to someone who can drive better outcomes for their members,” Rowell said during her prepared remarks on Monday.

The wrong benchmark

Applying a listed strategic asset allocation benchmark could lead to funds favouring passive exposure over investment in active management which can provide diversification and provide downside protection, experts have said. The argument has also been made that applying the government’s benchmark will disadvantage funds holding unlisted assets which have a higher divergence in risk profile and returns compared to listed markets.

“It only looks at a small component of what drives retirement outcomes, it fails to accurately assess past performance, and it will distort the future decision-making process of trustees away from investing in the best interests of member,” Colin Tate, The Conexus Institute founder and chair, noted on Sunday.

APRA’s own heatmap document stateed the following in relation to fair evaluation of investment performance: “[E]ach product has its own unique membership, return objectives and risk profile, which will influence its investment strategy and, ultimately, the investment returns that are achieved for members. To account for these differences, APRA has analysed a number of different investment metrics to assess performance on a risk-adjusted basis and to consider an RSE licensee’s performance relative to peers.”

According to the Federal Budget papers the performance test is designed to allow the performance of products to be compared easily because the benchmark is tailored to each product’s asset allocation.

The budget papers outlined the new test will be customised to individual products and continue to provide funds with flexibility in constructing their investment portfolio as well as assess actual performance (net of fees and taxes) and allows funds to target long-term returns and not blame ‘one bad year’ for underperformance because it is calculated over an eight year period.

Smith is head of content and managing editor of Professional Planner and Investment Magazine.
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