The Financial Services Council has argued the remit Your Future Your Super performance test should stay focused on simpler product structures for the set-and-forget crowd.
The report, conducted in conjunction with researcher NMG, said the test should only apply to MySuper and “Simple Choice” – defined as products that have more engagement than default – and not “Broad Choice” which involves more personalisation, particularly from financial advisers and should acknowledge the importance of their role.
“Applying a performance test to Broad Choice products, all single-sector products in Simple Choice, and retirement products would result in poor member outcomes, and place a significant burden on providers (with additional cost for no member benefit),” the report said.
Applying the test to only apply to MySuper and Simple Choice products was among five recommendations in the report, which also noted that the adviser role should be better acknowledged in Choice customers’ decision-making when it comes to regulatory application of the Retirement Income Covenant, which requires super funds to have a Retirement Income Strategy for members.
The council argued interpretation of the covenant should encourage trustees to acknowledge and support members who have made an active choice of a product or investment option.
“Requiring trustees to develop strategies for members, when those trustees already provide choice for members, has the effect of an additional regulatory layer without any clear member benefits,” the report said.
“For members who have a financial adviser, their adviser is best placed to understand their retirement needs and objectives and develop a financial plan that is suited to their specific circumstances.”
The report also recommended consolidating the member outcome assessment, which is intended to ensure funds assess their performance towards promoting the best financial interests duty, into other trustee obligations.
“Member outcomes have been a significant regulatory and disclosure requirement (with additional costs to funds and members) without any additional benefit to members, as no improvements have flowed through to members,” the report said.
The regulatory framework should recognise that “Broad Choice” product users have already set up and chosen their preferred engagement and communication preferences with their provider.
“The regulations impede the flexibility of choice and platforms to communicate to members effectively,” the report said.
“For example, notices advising the failure to meet the performance test do not consider platform features or allow trustees to provide meaningful information. For Broad Choice products, the communication requirements are more extensive for underlying investments in non-superannuation vehicles (e.g. managed investments).”
Fee templates should capture the range of different configurations, allowing “Broad Choice” structures to be “more easily reported and contextually interpreted” by superannuation members.
“While Choice products are able to satisfy requirements for fee disclosure (ASIC Regulatory Guide 97), the structure and amount of tailored fee arrangements for members, advice groups and asset management products means there is significantly higher complexity in providing fees into heat maps, performance tests, and comparison tools,” the report said.
The advice and retail super fund sectors have criticised expansion of the YFYS test and how it has been applied to Choice products, due to nuances in fee structures and individual decision-making that make it difficult to compare products.
The report noted that broad Choice products are closer in application to SMSFs than MySuper products, in that a higher level of personalisation is involved, which means the application of a performance test would put products up against non-relevant benchmarks that could contradict their Target Market Determinations, a requirement under the Design and Distribution Obligations for product makers to outline the specific investors and circumstances their products suit.
Furthermore, a single trustee-created default option can work in accumulation, but in retirement other factors like drawdown needs and spending profiles complicate the application of a uniform test, which was proposed in the latest round of consultation on the test.
