The $370 billion Australian Retirement Trust (ART) says that the proposed introduction of a CPI+X benchmark for “emerging asset classes” or the move to a simple reference portfolio in the Your Future Your Super performance test would heighten system-wide risk without improving investment outcomes.

“We do not believe that either introducing a CPI+X style benchmark or adopting a risk-adjusted reference portfolio will improve investment outcomes,” ART CIO Ian Patrick wrote in the fund’s submission to Treasury’s Strengthening the superannuation performance test consultation.

“Further, by enabling and/or encouraging funds to move to less investable benchmarks, ART’s view is that both Option 1 and Option 2 have the potential to increase system-wide risk by increasing the likelihood that asset class ‘market’ movements trigger multiple concurrent fund performance test failures.”

ART also said that the performance test as it stands was not a constraint on its ability to invest in asset classes like social housing, renewable energy and venture capital and that the introduction of a CPI+X would not see more superannuation money flow to them, adding that the performance test is “not a primary consideration when making such investments”.

There are also problems with the use of CPI+X benchmarks themselves, the ART submission said. They do not represent the return available in competing investable markets, making them unsuitable for assessing relative value or capital allocation decisions; outperformance against them will generally be reflective of market tailwinds, meaning they don’t create accountability; and they aren’t a credible alternative to the investment being measured against them.

“In failing these criteria, CPI+X benchmarks risk the introduction of system-wide risk as it becomes increasingly likely that most assets compared to this benchmark will significantly underperform at the same time,” the ART submission said.

“In addition, CPI+X benchmarks do not solve the J-curve issue alluded to in Treasury’s paper as investments prone to negative or low returns in early years will still lag a CPI+ benchmark.”

However, the fund said that introducing a routine review of the benchmarks is a “targeted and proportionate way” to improve the performance test, and that an ongoing APRA-led benchmark review process – informed by industry consultation – would allow the test to evolve with the investment universe while preserving comparability and accountability.

It also said that the introduction of new benchmarks for alternative asset classes would be a “marginal improvement” over the existing test, noting that many strategies listed in Treasury’s consultation paper – including commodities, insurance-linked securities and distressed credit – have recognised and investable benchmarks that could be used in the place of the existing alternatives benchmark.

Simple reference portfolio
While the fund said there could be “some merits” to adopting a variant of risk-adjusted comparisons against a simple reference portfolio for the performance test, it warned that any simple reference portfolio (SRP) benchmark approach is likely to be “inferior” to the existing test and would only be accretive for investment options where the existing test faces significant challenges – like sustainability-focused or faith-based options.

“If introduced, ART believes that an SRP benchmark approach should only be introduced in a multi-metric test, as a complement to the existing SAA-focused [strategic asset allocation] approach,” the ART submission said.

“We do not support introducing the SRP approach as an alternative methodology within the existing test framework as this would introduce elevated system-wide risk.

“Specifically, in a 10-year period of sustained low volatility and strong listed equity outperformance, there is a non-trivial risk that the SRP benchmark could outperform a significant portion of the industry on a risk-adjusted basis through naive concentration in the highest performing asset class.”

But the fund would support performance testing of a broader range of products, including externally managed platform offerings that “otherwise meet trustee-directed criteria”.

“However, careful design will be needed to keep the framework fit for purpose and to avoid structural benchmarking issues that can disadvantage single-sector and values-based options,” Patrick wrote.

“Specifically in relation to retirement products, ART considers the current performance test unsuitable for assessing the obligations of the Retirement Income Covenant, which are framed around broader member outcomes such as income stability and sustainability, management of longevity and inflation risk, and flexible access to capital.”