Conexus Institute executive director (left), FAAA chief executive Sarah Abood and SMSF Association CEO Peter Burgess.

Consultation on the Your Future Your Super performance test has provoked industry pushback against expanding the test into the retirement product and self-managed super fund sectors.

The government launched a wide-ranging consultation on the performance test in March, covering potential new areas of coverage as well as a review of the methodology applied.

The consultation closed on Friday last week and the Financial Advice Association argued in its submission against expanding the test into the decumulation phase of superannuation, noting retirement products can’t be easily changed without serious consequences.

“We have reservations about extending the performance testing to retirement-phase products,” the FAAA said.

“This is particularly the case with annuity-type products that cannot be readily compared and are significantly impacted by interest rates at the time of commencement.

“There are other important differences with account-based pensions. We would suggest that more thought might need to go into this before further extending the performance testing to retirement-phase products.”

The Conexus Institute, an independent think tank philanthropically funded by Conexus Financial, the publisher of Professional Planner, argued in a submission that “care is needed” in applying the test to retirement products, and that the focus should instead be on the overall evaluation of retirement income strategies under a member outcomes assessment framework.

“While performance testing might be applied to account-based pension products as part of this broader assessment, we recommend against the using existing performance test,” the institute’s submission said, going on to suggest a multi-metric test.

Chant West general manager Ian Fryer warned the Professional Planner Researcher Forum last December that a YFYS test on retirement products would be “an utter disaster”.

The YFYS test was originally introduced in 2021, covering only MySuper products, with choice products included in the 2023 test results.

Professional Planner reported that while many industry funds had initially been against the test, those same funds have warmed up to it now they have become familiar with the process and potentially able to game the system.

Keeping it ‘self’ managed

The consultation sought feedback on incorporating SMSFs into the testing regime, which received heavy pushback from the SMSF Association.

“We do not support the introduction of a performance test for SMSFs,” the association said in its submission.

“To do so would create unnecessary regulatory burden, red tape and add further cost to the system for all stakeholders, for little benefit. Individual SMSFs are not marketed to the public and are closely held, private funds.”

The association argued the uniqueness and nature of the sector makes benchmarking of individual funds “challenging and of little value”.

“The trustees’ existing duties and obligations require them to consider the needs of members and the fund’s investment strategy,” the submission said.

“This, coupled with the advice services they receive, and the statutory, professional and ethical duties imposed on those professionals, further safeguards the sector.”

The FAAA backed the SMSF Association, stating it was both “unnecessary and inappropriate” to extend the test to the sector.

Legacy issues

The FAAA has been critical of the YFYS test since its expansion into choice products, due to the implications for advisers who may have to deal with clients scared into making product switching decisions that might not be in their best interest.

The FAAA said the government could do more to offer tax relief to help the consolidation of legacy superannuation products that require clients to be moved out of.

“This would reflect the existing options available to merge funds,” the FAAA said. “We would strongly encourage this action to help address the large number of legacy investment options.”

The association has also argued against how fees are applied to choice products, noting that member balances are typically higher than the $50,000 standard currently used in the test and don’t take into consideration variable fees on higher balances.

While the Treasury consultation paper argued “some stakeholders” preferred a longer lookback period for administration fees, the FAAA disagreed.

“Performance testing has had a real impact on administration fees, which is very positive for consumers,” the FAAA said.

“If fees have been brought down as a result, then this should be recognised. The thing that matters is what the fees will be next year, not what they were five, eight or ten years ago.”

Arguing against the eight-to-10-year performance timeframe, the FAAA said that from an adviser’s perspective a fund’s poor performance more than five years ago isn’t relevant.

“Advisers are unlikely to recommend a client move away from a fund with strong three-year performance because the [eight to 10-year] performance is poor,” the FAAA said.

“The longer-term performance timeframe does tend to penalise funds for the long term, making it very difficult to recover.”