APRA’s ‘failed’ funds: Be alert but not alarmed

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APRA’s ‘failed’ funds: Be alert but not alarmed

More than one million Australians will shortly receive correspondence from their super fund informing them that it has just failed the regulator’s fund performance test. The question is what, if anything, you should do about it.

The annual fund performance test was triggered by the federal government’s recently passed Your Super Your Future (YSYF) legislation. This requires the industry regulator, the Australian Prudential Regulation Authority (APRA), to assess the performance of all workplace default funds with a MySuper investment product.

APRA has now measured funds’ MySuper investment performance over the past eight years against a benchmark portfolio with a similar asset allocation. To pass the test super funds must achieve returns over the period of no more than 0.5% below the benchmark.

Which funds failed the test?

To enable comparison of traditional ‘balanced’ and ‘lifecycle’ portfolios, in which investments are adjusted as members age, the APRA test calculates returns for a 30-year-old with an account balance of $50,000.

The APRA list of the 13 underperforming super funds provides insight into the number of members affected in each case, equating to a total of over 1.1 million fund members.

The content of the letter that affected members will receive is largely prescribed by the regulator offering fund trustees little opportunity to argue their case for underperformance. It will direct members to the new Australian Taxation Office (ATO) super fund comparison tool to help them decide whether to move their super to another fund.

The government’s intent, under the minister responsible for superannuation, Jane Hume, was that the performance test would help members avoid the financial impact of long-term exposure to investment underperformance.

The need for this was highlighted in 2019 by the Productivity Commission, whose report on the superannuation system estimated that a typical super fund member could increase their retirement savings by around $660,000 simply by moving from the worst performing to the best performing fund.

Super’s response to the APRA test

Despite the government’s good intentions, the release of APRA’s performance test methodology and results with their blunt and binary ‘pass/fail’ pawn shop loan in MT outcome has been widely criticised by the superannuation industry – including industry associations and technical experts.

Amid the inevitable charges of industry self-interest behind this commentary, it is worth noting that the super industry is keen to remove underperforming funds. It would generally prefer to achieve this through merger or the transfer of members to better performing funds. Otherwise, it broadly supports the intent of the performance test.

Speaking at this month’s Australian Institute of Superannuation Trustees (AIST) conference, Australian Super’s Chief Investment Officer, Mark Delaney, said that there was a lot to like about the thinking behind the test and agreed that there are many underperforming funds that have been ‘skating by in the industry for too long’, not getting the results their members deserved.

“The big dirty secret of the super industry is that most funds don’t do much better than a passive [investment] portfolio. If you can’t do better than passive, why should you spend members’ money? If you’re no good, you should quit like anything else in life,” he said.

Super Consumers Australia advocates for Australian consumers with superannuation investments. “The bottom line is these funds have underperformed. Unless there is some specific reason to stay, you should think about moving to another fund to build up your retirement income,” said its director, Xavier O’Halloran, although his organisation cautioned members to do proper research before deciding to switch funds.

Possible flaws in the test

Australian Catholic Superannuation and Retirement Fund (ACSRF) received an APRA ‘fail’ but is critical of the test’s application to its MySuper product (ACRSF is not to be confused with another fund, Catholic Super, which passed). ACRSF reconstructed its MySuper product about three years ago from a traditional balanced option to a lifecycle solution more tailored to individual member outcomes. It gradually transitions members from age 40 to a more risk-averse portfolio.

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