The government will review the framework of the Your Future Your Super performance test, opening the door for a rethink of how fees on choice products are measured.
The consultation paper for the review was released on Friday and choice products – otherwise known as trustee directed products (TDPs) – were included in the last testing round which faced criticism from the industry for how fees were measured, along with potential CGT implications if advised clients had to move out of a failed product.
The test found the median administration fees and costs for platform TDPs were the highest at 0.54 per cent of assets, compared to 0.27 per cent for non-platform TDPs and 0.26 per cent for MySuper products, but this was based on a balance of $50,000 and didn’t take into consideration lower variable fees for larger investments.
But the consultation asks how fees should be measured under each design option, and whether peer comparison is the best method of measurement.
It also seeks additional feedback on whether the current assumptions made in comparing fees is appropriate, even suggesting the $50,000 figure be adjusted based on the median member balance for a product cohort.
“In extending the test to TDPs, some stakeholders raised concerns with testing administration fees at the investment option level, given some of the complex business and fee arrangements that occur in the choice sector,” the consultation paper said.
“Further, some members may invest in multiple investment options within their account, a practice that is more common in the choice segment, particularly platforms.”
AMP and Insignia Financial were the most caught out by the inclusion of choice products in the test, having operated 75 per cent of the failed funds.
In a statement sent out by an AMP spokesperson, it said the organisation welcomes the review noting previous concerns about test for TDPs.
“Rather than apply a ‘one size fits all’ methodology, the test needs to recognise the importance of choice for members and that products are designed with different risk and performance benchmarks to meet the differing needs of members,” the spokesperson said.
“Importantly, we will also be recommending the government address the immediate issue of providing capital gains tax relief for those members who are in products which haven’t met their performance benchmark.”
Insignia also welcomed the consultation, with a spokesperson saying it was “an opportunity to address some fundamental flaws in the current test, and enable it to better represent actual member outcomes” across all sectors covered by the test.
Defining performance
In the broader overall landscape of the test, the consultation suggested four potential frameworks to measure performance – two new ones that are either based on a single metric or multiple metrics, as well as retaining the status quo or an industry-proposed framework.
The “alternative single-metric” will consider a different metric that would “better assess” performance with Sharpe ratio (risk-adjusted returns above the risk-free rate), peer comparison (providing risk-adjusted returns compared to peers, or whether a product provides superior investment returns relative to a simple benchmark portfolio that bears a similar level of risk.
A “multi-metric framework” would instead either measure performance via the APRA heatmaps or alternatively, a “targeted three-metric approach” such as risk-adjusted returns, implementation of promises to members, and cost to members.
Additionally, the paper floated whether to expand the test to all APRA-regulated products, which it is not currently legislated to do.
The rationale cited by the review is that it would uphold the integrity of the full super system and reduce incentives for trustees to restructure products to avoid the test, encourage members into products that aren’t tested, and increase fees on untested products to subsidise tested products.
The consultation has also asked for feedback on whether it should test the performance of retirement products, and how this should be implemented, if so.
The paper noted a “summary scorecard” recommended by the Conexus Institute, the retirement-focused think thank philanthropically funded by the publisher of Professional Planner.
The scorecard would assess whether the product maximised expected income, managed income risk and provided flexible access to funds.
