While APRA will have “significant input” into the government’s proposed Your Future, Your Super (YFYS) performance test which is not yet set in stone, Helen Rowell, APRA’s deputy chair has expressed a preference for a “bright line test” to cut through the industry’s enduring debate on measuring performance.

“One of the biggest challenges we have faced tackling underperformance and lifting member outcomes has been the argie-bargie we have had with the industry about what is performance and what is not,” Rowell said during an interview as part of Investment Magazine’s Chair Forum last Friday in a closed broadcast for chairs of superannuation fund schemes.

“It’s going to be interesting to see the impact on investment behaviours, investment strategies and outcomes… If you think you’ve got a risk return strategy that’s right for members and you think you can implement it effectively for members then you shouldn’t need to shift. If it’s not working then it should be reviewed and changed.”

“We think having a bright line test will be helpful and is important in accelerating our efforts to lift outcomes,” Rowell said.

Rowell confirmed APRA continues to have input into the final regulation outcome relating to the performance test following on from the proposals outlined in the October budget document but expressed frustration with its interactions on the topic of performance measurement.

The government is expected to progress the YFYS reforms early this year in advance of 1 July implementation. Contained within the proposed reform package is the requirement for MySuper funds to not underperform a listed reference portfolio by more than 50 basis points over eight-year periods or face actions which could result in the closure of funds to new members.

“We had some frustrating engagement with some trustees who wanted to debate the outcome and whether it was a relevant assessment or not. Ultimately we are pushing through and there are more investment changes and fee reductions coming through,” she said when asked to characterise then the recent heatmap findings.

Rowell also noted the regulator will continue to pursue a broad range of measurements to assess fund quality via its heatmaps disclosures in addition to the listed SAA benchmark portfolio measure used as a basis for the government’s proposed YFYS performance test.

Forty-seven funds were highlighted to be underperforming in APRA’s latest heatmap fund performance disclosures released in December, 11 of these funds exited the industry through mergers or closures. Meanwhile 11 funds were separately judged to have significantly higher costs than appropriate, with eight of these funds announcing fee reductions during the reporting period.

Merged funds

How performance measurement is applied to merging funds taking on performance track record is still being worked out, Rowell noted, highlighting that a close eye will be kept on funds trying to game the system by closing poor performing products and then opening new ones.

“There will be flex for example for new funds to use a shorter minimum period or for a decision to be made about what is the performance history for merged fuds should looking like taking into account relative size and performance… the flexibility will be there,” she said.

Rowell also used the forum to address the regulator’s agenda to encourage funds to merge, noting that mergers of smaller funds of similar size might not necessarily be in member best interests.

“Is there a merger partner for every fund? Yes and no,” she said.

“We don’t think the merger of some small entities to make a slightly bigger entity is necessarily the right outcome. Sometimes the right merger or the right merger partner is a small fund with a bigger one and the dynamics of that merger agreement will be very different… it’s actually a small fund recognising it isn’t sustainable and is unable to offer good outcomes for its members,” she said.

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