Mercer's Emily Barlow and Nichola Callil from Willis Towers Watson

Treasury released a more comprehensive version of the super fund performance test in draft regulation underpinning the Your Super, Your Future reforms on Wednesday with the inclusion of administration fees and added benchmarks for unlisted property and infrastructure.

The amendments headline a raft of changes that appear to make the test – the backbone of the YFYS reforms – a more accurate reflection of fund performance and one better geared towards providing transparency for members.

“These reforms are estimated to save Australian workers $17.9 billion over 10 years,” Treasury stated in a note on Wednesday.

Treasury accounted for concern that the inclusion of administration fees would hurt funds that have a proliferation of smaller account with a poorer fee-to-balance ratio by benchmarking against a notional $50,000 balance instead of actual balances.

While the methodology makes for a less representative metric, Nick Callil, Willis Towers Watson head of retirement solutions, believes it’s a reasonable compromise.

“There are funds with members that have $500,000 and it doesn’t really represent them either, but you need a benchmark,” he said.

“It’s a strawman measure so it doesn’t reflect exactly what’s occurring, but there was a lot of pressure to provide net return after fees so it addresses that issue,” Callil continued. “There was no easy solution to this.”

The Conexus Institute executive director David Bell called the change a “good improvement” for members, noting that it “better aligns with the concept of a consumer test”.

Mercer consultant Emily Barlow agreed, noting that improved transparency is a win for consumers.  There could however be better optionality around the inclusion of administration fees, she said.

“I can see pros and cons,” Barlow said. “It’s a standalone fee and some people are willing to pay that fee for increase services while others just want the lowest fee possible.”

ASFA CEO Martin Fahy said adding fees to the equation will “align the benchmark to the reality of returns members see”, and go some way to addressing anomalies across the costing spectrum.

Common sense inclusions

The inclusion of standalone benchmarks for unlisted property and infrastructure is being lauded as a common-sense amendment that will help the test better reflect true performance, the consultants agreed.

The new indices listed are the MSCI Australia Quarterly Infrastructure Fund Index and the MSCI/Mercer Australia Core Wholesale Monthly Property Fund Index.

“Previously these investments were getting assessed against listed benchmarks, so moving towards unlisted benchmarks is definitely an improvement,” Callil said. “That’s been fixed.”

The consultant says there is some residual concern over the “other” investment category, which could see alternative approaches that have low correlation to traditional investment sleeves benchmarked inappropriately. “But overall the changes are an improvement, that’s for sure,” he said.

The inclusion of unlisted property and infrastructure also heads off a looming danger – funds being inhibited from investing in vital infrastructure projects.

ASFA’s Fahy said funds’ allocation to unlisted investments has been “an important element in their outperformance” compared to international contemporaries.

“The changes announced today have the potential to mitigate investment distortions foreshadowed by the industry when the benchmark was first announced,” he noted.

Strengthened package

The draft regulations also included several other measures designed to strengthen the reform package, including ‘tie-breaker’ rules for determining which fund multi-fund members get stapled to and guidelines on how to disclose portfolio holdings to members.

Time is tight for the Your Future, Your Super reform package. The draft regulations will be out for consultation until May 25, with only two months then left until the provisional July 1 implementation date.

Industry sources said APRA would be well-placed to handle the performance test given most of the algorithms are already embedded in its heatmap technology.


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