There is so much written about investment behavioural biases, but there probably needs to be more written about behavioural biases relating to policy assessment. I’m sure I’ve fallen victim to these biases many times. Four come to mind:
- Jumping into the detail rather than looking at the policy from a high level and assessing whether it will improve end outcomes.
- Applying a narrow lens and assessing the policy on a standalone basis, thereby failing to account for the adjustments that industry and regulators will make and likely future policy reviews.
- Allocating too much time to striking down the strawman relative to developing better solutions.
- Looking at policy through its impact on your own situation rather than through a consumer lens.
These biases mean we may miss the forest from the trees. To a degree, that has been the case in the way industry has scrutinised the Your Future, Your Super (YFYS) reforms. The Conexus Institute submission and all related research is available here.
Stapling and the performance test are the key areas to explore further.
Stapling – either solution will benefit consumers
The debate around which stapling model (stapled to your first fund or a single account which transitions to the default of your current employer) has raged to the point where stapling is now at risk of not proceeding. Our assessment is that either stapling model would improve consumer outcomes.
The debate on which model is best is far from clear cut. Consider the following issues:
- Transaction costs: there has been little estimation of the system-level transaction costs associated with the current employer stapling model. Our basic calculations suggested these expenses could be $200m per annum.
- Insurance arrangements: the concerns about inappropriate insurance arrangements, particularly for people in arduous and hazardous roles, are important. But surely quality public offer arrangements need to be able to provide quality arrangements for all members. I expect insurance in super will likely be further reviewed.
- Competition: it is easy to bemoan a model that pre-ordains a small handful of winners. But is a system that preserves a larger pool of winners any better? It is the type of competition which will exist (consumer-based with little institutional competition to recognise complex innovations) which concerns me more and neither model addresses this.
Despite having been a long-term supporter of the current employer stapling model we think the first fund stapling model stands up as reasonable, especially when you consider how industry will adjust and account for likely future review work.
Performance Test – flawed concept more important than flawed design
Here the tendency has been to jump straight into analysis mode. The provision of a formula sometimes feels like a red flag to a bull.
The high-level issue is how well the performance test will inform future performance – this is what impacts consumer outcomes. The secondary issue is how well the performance test measures past performance – how accurately ‘past sins’ are measured.
On the high-level issue the performance test will only moderately inform future performance. The academic debate on this topic (persistence of past performance) rages without conclusion. Yet other information which may also inform future returns is being left aside, namely through-time changes made to governance, investment capability, investment strategy and fees (particularly administration fees). APRA has been pushing funds to improve in all these areas.
At the high level I can’t see how a bright-lines test applied retrospectively will improve consumer outcomes compared to further resourcing and strengthening APRA’s current approach which marries multiple metrics (to account for the difficulties of measuring performance) with front-line assessment.
However, policy is what it is, and in this case Government appears committed to a ‘past sins’ test, which perhaps is easier to explain to consumers (another example of a trend towards finding populist messaging around superannuation).
So the best that can be done here is to roll up the analytical sleeves and ensure that the test:
- Is as fair an assessment of past performance as possible.
- Won’t overly distort investment decision-making away from acting in members’ best interests.
We find that the test is a relatively poor measure of past performance because it doesn’t measure all sources of performance and is risk agnostic. An additional risk-adjusted metric based on past returns would be a simple way to significantly improve the test and make it a fairer assessment.
On a positive note, following inclusion of additional indices for unlisted property and infrastructure, we find that the test will not overly distort investment decision-making (with some exceptions). Funds will need to keep an eye on the test and how they are tracking against it, but good funds shouldn’t have to make wholesale changes to their investment strategy.
Outcomes
Consumers will benefit from implementation of a stapling model. It would reflect poorly on all of us if we failed to achieve this because we argued the detail rather than the high-level.
We don’t expect a bright-lines performance test will significantly improve forward-looking returns for consumers versus the alternative which is a well-resourced and strengthened APRA model applying multiple metrics plus frontline assessment. All the debate over detail is largely a secondary issue to ensure that the ‘past sins’ of funds are fairly assessed.
Let’s hope that as our elected parliamentarians debate and negotiate the YFYS outcomes that they can distinguish forest from trees and deliver good consumer outcomes.
