The Your Future, Your Super (YFYS) performance test is a classic case of a problem which has flaws, is easy to critique but hard to fix. It is a tough situation for policymakers, highlighting the challenges of effective policy design in complex systems.
Much of the problem is that YFYS sits in legislation which significantly reduces the room for major overhaul. Moving it to regulation would help create an evergreen framework which provides sustainable protections for consumers.
Legislative solution is difficult
It is easy to find fault with the YFYS performance test, but its intent is laudable, and first order impacts have been positive. Our interviews-based research demonstrates strong support for a performance test as a way to protect consumers, especially those in default products.
However, the test is not without significant challenges. One of which is the test looks backwards not forwards, only partially aligns with member outcomes, is risk agnostic and is actively gamed. The test distorts funds from making decisions which best align with member outcomes. Our research suggests that this distortion could cost consumers significantly.
YFYS is not an evergreen policy framework, meaning one which can readily accommodate issues which arise. Already we’ve seen a range of issues which are proving problematic. Prominent examples include ESG and sustainability as well as trustee risk-based decisions in conservative options. Undoubtedly further issues will arise in the future.
In the current framework, the two options are to modify the test or to create policy carve-outs. We think carve-outs will likely be gamed due to the difficulties this sector faces in definitions and measurement.
The legislative process for YFYS
It is useful to understand the legislative policy process and the pressures faced by each participant in the policy chain.
Treasury, on direction by the appropriate minister, reviews policy and makes recommendations back to the minister. For YFYS, it is Stephen Jones, minister for financial services. Their timeframe is relatively short and, because of the rotation model which operates at Treasury, there is a period of getting up to speed with a complex and nuanced topic. In the case of YFYS, the timeframe is constrained by the need for the performance test to be applied next July.
The minister may endorse or suggest alternative solutions. There is also the reality of politics: the YFYS performance test is a heated issue, and likely no minister would want to be seen to be reducing consumer protections, whether that is the case. It is likely the opposition would attack any perceived weakening of YFYS.
Treasury specialists then draft the recommended solution. Converting complex formulae into legislation isn’t easy, so that weighs against a solution based on multiple metrics. Explanatory materials are produced to assist members of parliament and senators understand the legislation. At this point any changes, for instance resulting from negotiation, create further drafting challenges.
Legislation must pass through both houses and, if significant changes are proposed, debate could be lengthy. In the case of YFYS, with critical timelines, this adds to the likelihood of modest change.
Finally, if approved, any changes to YFYS legislation are passed on to the regulators for implementation. APRA administers the performance test so they would have to collect any additional required data while ASIC monitors disclosures made to impacted members.
You can see how, given the inertia created by the existing legislative framework, combined with timeframe constraints and political pressures, that the performance test will likely only ever see modest change. This means it will continue to encounter challenges into the future.
One way to break this nexus of legislative framework, timeframe constraints and political pressures is to move the performance test from legislation to regulation. This means giving APRA the appropriate powers and resourcing to design, oversee and enforce performance testing.
This may sound radical but less so once you consider APRA already administers the performance test, developed and applies a multi-metric heatmap, and undertakes qualitative reviews through its frontline function.
The threshold issues are resourcing, data and establishing appropriate enforcement powers. To work, APRA requires an appropriate balance between enforcement powers which can’t be challenged in court and the ability to provide some discretion based on their own insights.
These issues don’t need to be resolved right now. The first step would be to announce intent and an appropriate timeline. For example, a three year timeframe for the performance test to be moved from legislation and into regulation.
Implemented well, this would provide an evergreen framework for improving consumer outcomes and making performance testing work better across the entire system.
David Bell is executive director at The Conexus Institute.