Tuesday was D-Day for about 25 or so superannuation funds certain or borderline-likely to fail the government’s new performance benchmark.

In the end only 13 funds faced this dubious fate, a smaller number than was expected based on APRA’s heatmap data. These funds will now send letters to all their MySuper members informing them of performance test underperformance this week.

APRA has been in discussions for the best part of the past four weeks with all of the 76 providers of MySuper products via a special member outcomes unit set up specifically for the purpose of engaging funds on the performance test result.

Many of the funds skating close to the 50 basis point strategic asset allocation listed benchmark buffer wouldn’t have known their fate one way or the other until they were informed late on Monday; APRA’s special purpose member outcomes unit kept its cards very close to its chest during the process, one fund executive described.

Investment Magazine spoke to several fund executives in recent weeks and months who have found themselves on either side of the government’s new performance benchmark, which was unveiled in October last year during the Budget and refined before becoming legislation via an amendment Bill in June.

‘Rough justice’ has become a refrain repeated by some of the executives among the 13 funds with a so-called first strike: BT Super’s MySuper Retirement Wrap product, Colonial First State’s FirstChoice Superannuation Trust, ASGARD’s Employee MySuper product and AMG MySuper are among the so called retail funds on the list, with profit-for-member funds Australian Catholic Super’s LifetimeOne, AvSuper, Energy Industries Super Scheme’s balanced MySuper product, Maritime Super and the Victorian Independent School’s super fund along with corporate plan BOC accounting for the remainder of the list.

“The performance test is effectively the new framework, it’s the new environment, and we need to operate within that new environment,” AvSuper CEO Michael Sykes said during an interview on the eve of the performance test result. AvSuper is the superannuation fund for around 6000 workers in the aviation industry with around $2.7 billion in retirement savings.

“We are still going to continue within those parameters now to focus on how we can provide for members and act in the members’ interests,” Sykes said.

Some funds were on the radar of the performance benchmark but managed to scrape through the first hurdle have credited moving early and addressing the headline issues called out by the policy intent quickly.

“We were very fortunate because we started significantly restructuring our investments in order to deliver better member outcomes as prescribed by the by the [APRA] heatmaps about two years ago so we had a running start coming into the performance test,” Vasyl Nair, the current and interim chief executive of industry fund Mine Super.

Mine’s MySuper lifecycle product had performance numbers some 50 basis points off the pace of the 50 basis point benchmark buffer prescribed by the performance test based on December 2020 data but managed to avoid failing the test this week.

“Turning around a seven-year trailing history in a short period of time in a responsible member-aware, trustee responsible manner is extraordinarily challenging and I certainly feel for the people at those organisations who continued those kind of strategies that weren’t able to turn it around,” Nair said.

In an interview  on Tuesday Nair and Mine Super CIO Seamus Collins described adjustments to dynamic asset allocation, a simplification of investment approach by increasing passive equities footprint, dumping defensive alternatives to fixed income such as defensive ‘put’ strategies and getting laser focused on costs.

Some funds that weren’t able to move the dial on the performance test outcome quick enough faced the topic head on, while other funds preferred to keep their comments off the public record.

Christian Super CEO Ross Piper raised the possibility that being an early mover into ethical and impact investing – areas the funds engaged membership values highly – might have been the fund’s biggest challenge to overcome when it came to meeting its new performance test obligations.

“It’s difficult because that’s a really important part of our brand proposition and it’s what makes us distinctive and its consistently one of the reasons that members tell us they want to be with this fund,” Piper described in an interview with Investment Magazine.

“But those things may not be fit for purpose in a shorter market cycle or a shorter measurement timeframe so you’ve got to make changes, you’ve got to make adjustments but it’s challenging to turn that around in time,” he said.

Across the board funds that struggled and strived to reach the performance benchmark hurdle lamented downside protection embedded in portfolios and also highlighted the benefit of growth exposure and ensuring risk is managed at the strategic or broader portfolio level rather than within the respective asset classes.

“What policy makers are saying is they want MySuper products to be low cost and they want them to be reasonably simple and clear in construction,” Mine Super’s Collins reflected.

“Too complex and you have to manage complexity, because complexity introduces cost, arguably, and it makes it harder to see where your strategy is going,” Collins added.

“You could say that simple products and construction does close off avenues for innovation but I think the industry is at its best when it’s focused on getting the big decisions right rather than really too clever with its investment implementation,” he said.

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