The $280 billion AustralianSuper − the country’s largest super fund − has called for the scrapping of the range of benchmarks used for the Your Future, Your Super (YFYS) performance test, replacing them with one universal industry benchmark.
In its submission to the Federal Government’s review of the superannuation performance test regime administered each year by APRA, AusSuper says each fund’s performance should be measured again one industry benchmark which is tailored to the product type.
“The performance test should be adjusted to reflect relative performance against a universal industry benchmark,” the fund says in a submission by joint acting chiefs of strategy and corporate affairs Mark Corner and Chris Cramond.
This would ensure “a more objective test is applied to all industry participants, as well providing consistency and clarity to members seeking to use the information to make decisions about their retirement savings”.
The fund’s comments come in response to draft regulations proposed by the Federal Government in April to the performance testing regime which came into operation in August 2021 for the MySuper default products, following a review of the system announced by the Albanese Government last September.
The draft changes to the YFYS regime include the introduction of more benchmarks and the extension of the performance testing period from the current eight years to ten years. The government plans to extend the revised testing regime to the Choice sector in July this year.
AusSuper rejects the idea of adding more benchmarks to the system, arguing it will not improve the effectiveness of the current testing regime and could make it more complicated for members to compare the performance of different funds.
“We question the value of adding complexity from a member and comparison perspective,” its submission says.
The fund argues the current situation, where funds are judged against a suite of asset specific benchmarks, “only measures how well a fund has implemented its chosen strategy, not whether the strategy itself is effective in generating strong returns for members over the long term”.
Funds should be judged on their overall performance including their asset allocation strategy according to AusSuper.
“By adding more asset classes and sub-asset classes [as is currently proposed] the performance test will likely become more permissive in measuring how effective the strategy has been in generating returns for members,” it warns.
Making a ‘true comparison’
A true comparison should include all aspects of the investment strategy including asset allocation and portfolio construction as well as the selection of different securities says AusSuper.
Adding more benchmarks would mean the test was “increasingly anchored in just security selection which is generally the least important of the three aspects in generating member returns”.
The current performance testing regime could see funds choosing an investment strategy which involves “hugging the benchmark” the fund warns.
“Test outcomes are still not well aligned with outcomes for members that incorporate all dimensions of performance a fund can control,” it says.
While supportive of the extension of the testing period from eight to ten years, a move which it has recommended in the past, it argues that the performance test should use a timeframe for administration fees which is longer than the current one year period.
“Superannuation is a long term investment. “The investment performance period is eight years and being extended. Net benefit is what is most important to outcomes in members’ best financial interests,” the submission says.
The use of administrative fees on a one year basis for the comparative performance testing has led to situations where funds have adjusted their fees to change their administration and performance industry “in a way which may be short term and not reflective of long term administrative savings.”
The fund also recommends extending the performance testing regime to retirement products offered by super funds.
“The performance of retirement products is particularly important, given a member in retirement does not have an extended period of time to build savings like a member earlier in their working life,” it says.