Flaws in the application of the Your Future Your Super performance test have been highlighted once again as the industry fund and retail sectors grapple with various implications of the test.
APRA announced on Friday morning that 37 of the 192 platform products that were tested failed, including 27 that failed for the second time, meaning they will be closed to new members.
However, none of the 57 MySuper products failed, nor did any of the 398 non-platform products that were assessed.
AMP was responsible for 26 of the second-time fails, while Insignia was responsible for the other. All 10 new fails were AMP trustee products.
AMP group executive for platforms Edwina Maloney said that although the test is benefitting most Australians – and that all of AMP’s MySuper products had passed – the organisation is still concerned about the “detrimental impact” of the test for customers on wrap platforms.
“These investment options are only tested because they are inaccurately classified by the Government as ‘trustee directed’ and we strongly support industry calls for a review of the test,” Maloney said in a media statement.
“We don’t believe these options are ‘trustee directed’, meaning the current test is delivering misleading results and causing confusion and potential financial harm for consumers.”
Research from Chant West noted that only 10 per cent of all diversified choice products and about 2 per cent of all choice products are included in the test.
AMP noted the 36 investment options that failed the test make up 3.7 per cent of managed investments available through the group’s platforms, which represent about 1.8 per cent of all accounts.
Maloney said this makes it “impossible to use the test as the basis for properly informed investment decisions and product comparisons”.
Lack of advice
Financial Advice Association general manager for policy Phil Anderson again noted the burden the test results will place on advisers, given it may not be in the client’s best interest to move out of a product that fails the test, given potential CGT considerations or other personal reasons related to the client.
“It is particularly important to appreciate that these clients may have received advice and these products may in fact continue to be suitable for them,” Anderson said.
Financial Services Council CEO Blake Briggs said in addition to the adviser/client relationship implications, another concern is that platform investment options in the test have been misclassified as “trustee directed” despite the trustee having no control over the strategic asset allocation and investment decisions.
“These products should not be included in the test, and the consequences to consumers should be front of mind,” Briggs said.
MySuper gets ahead of the curve
The test was introduced by the Coalition government and expanded under the Labor government who have launched a consultation in March that proposed potential modifications to the test.
The Conexus Institute* wrote in a submission to the consultation that the industry was now actively managing the current test making it quite possible that no MySuper option will fail in the future.
The inaugural YFYS test had 13 fails in 2021, followed by five in 2022 and one last year.
“As such, the current test may have become ineffectual yet nevertheless has some adverse behavioural impacts,” the institute said in the submission written by executive director David Bell and research fellow Geoff Warren.
Chant West general manager Ian Fryer said the latest YFYS results is strong evidence that something has got to change to make the performance test more enduring.
“I think it can be argued that the performance test has fulfilled an important role of removing some underperforming products, although it also removed some products that we would argue were doing OK but the nature of the test disadvantaged them,” Fryer said.
“At an overall system level, that is probably a good thing, even though some decent funds needed to close.”
He urged Treasury to consider some of the other design options that surfaced during consultation. Chant West is advocating for a multi-metric approach that introduces one or two additional metrics (performance relative to simple reference portfolio, peer-relative test, or both) to complement the current YFYS.
“Ideally, we need a test that provides incentives to focus on what really matters to members – which is delivering strong performance to members for a given level of risk,” Fryer said.
“Minister [for Financial Services] Jones has indicated that he is keen to move to a more enduring test. One that focusses on risk-adjusted returns would be much better than what we have now and should lead to better long-term member outcomes.”
Calls for expansion
APRA deputy chair Margaret Cole said there is still room for improvement among funds even if the current YFYS regime were to continue.
“These are pleasing results but, as trustees well know, past performance is no guarantee of future success,” Cole said in a media statement accompanying the results.
“Even based on existing performance, there is significant scope for improvement across key drivers of performance, including costs and fees, and investment returns.”
Meanwhile, member-advocate group Super Consumers Australia is calling for YFYS to be extended to account-based pensions, which it said covers 1.3 million retiree accounts and $451 billion in assets. The nation’s largest super fund, AustralianSuper, made the same recommendation in its performance test submission.
“APRA has been sitting on this data for several years while retirees languish in accounts serving up high fees and poor performance,” said Super Consumers Australia director Xavier O’Halloran.
“We are calling on APRA to release the data before the end of the year so that Australian retirees can avoid poor performing super products.”
*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Investment Magazine.
