The proposed superannuation fund performance test had its shortcomings laid bare at an Economics Legislation Committee hearing held in Sydney to discuss submissions relating to the reforms.
The Your Future, Your Super 2021 bill’s headline measure, which requires the prudential regulator to conduct annual performance tests for MySuper products, was a clear step backwards according to University of New South Wales director for centre of law, markets and regulation Scott Donald.
Asked by Senator Tony Sheldon whether the proposed mechanism accurately measured returns, Donald said it failed because it missed out on key costs members faced.
“That’s unfortunate and inconsistent with the commendable focus we have seen over the last few years on member outcomes as opposed to fund outcomes,” Donald said. “I think that’s a retrograde step, unfortunately.”
The academic questioned whether the test was useful as a metric for fund performance, adding that he had “reservations” about its utility.
“Statistically… you can’t collect enough evidence over a short time to extrapolate what the future might hold,” Donald explained.
A more pressing concern, he added, was that the test’s seven year results period affected funds for an undue period of time.
“The test is insensitive to the fact that trustees, particularly if they’ve experienced a period of underperformance that they can address, are not going to wait seven years to do it,” Donald said. “But they will carry the history of that for seven years.”
Better metrics
Donald’s criticism of the proposal was backed by The Conexus Institute executive director David Bell, who called the performance test “ineffective” because it would catch the most egregious cases of underperformance yet struggle to identify the more realistic ones.
The test fails by only focussing on the implementation component of performance, Bell continued, and ignored other components of performance such as asset allocation. Further, the test employs “crude” public market benchmarks that ignore the benefits of diversification and “distorts assessment across many sectors”.
Bell acknowledged the “good intentions’ of the reform measure, but insisted that additional metrics would offset some of the performance test’s shortcomings.
According to the Conexus Institute’s submission, these additional measures include adding administration fees to the performance equation, incorporating additional asset class benchmarks and adding a second, “complimentary” metric based on modified research from Nobel Laureate William Sharpe.
“It is based purely off the realised performance of funds (so none of the benchmarking issues) and accounts for risk (ie the realised volatility of returns),” the submission states.
Consumer body support
Not all the morning’s speakers took issue with the proposed test’s settings, with Super Consumers Australia director Xavier O’Halloran telling Sheldon he had “no concern” that high-performing funds would fail the test and low-performing funds would pass.
In the SCA’s independent testing, O’Halloran said, there was a “high correlation” between tests that were low performing and those that were likely to fail the test.
“There’s really no concern for us,” he added. “This test is identifying poor performing funds.”
The YFYS reform bill is yet to be voted on, but has a short turnaround given the slated 1 July implementation date.
The economics legislation committee will hand in its report on April 22.
