Retirement Income Covenant, not the ‘Retirement Performance Covenant’

The APRA performance test is beginning to lose its focus with potential expansion that doesn’t address the spirit and intent the test was designed for, the Professional Planner Managed Accounts Decoded podcast heard.

The discussion came as the government consults on changes to the test which could see the expansion of retirement income products and managed accounts.

The Conexus Institute* executive director David Bell said there are issues with expanding it to both product ranges.

“We’re not calling it the retirement performance covenant, we’re calling it the retirement income covenant and income is different to performance,” Bell said.

“Performance can motivate income and shape the income profile, but there’s many other aspects and when you think about retirement, there are member preferences for a smoother journey or not to have large drawdowns.”

There were 13 funds that failed the first performance test in 2021, which only covered a pool of 76 MySuper products, but the test was expanded to include Choice products in 2023.

But the application of the test has drawn criticisms, including that it creates a homogenous environment where funds are hugging the benchmark and avoiding taking risks that would see them underperform.

The Albanese government has been consulting on changes to the performance test, including expanding to managed accounts and retirement products.

Bell said it’s a difficult proposition to think the test can be replicated across managed accounts and retirement products.

“There’s many dynamics and those dynamics are actually set out in the Retirement Income Covenant,” Bell said.

“However, if you believe that consumers benefit from performance testing, it is strange to have the accumulation performance test and not the retirement phase, so that’s the challenges at play.

“We’re saying that in legislation and in practice that retirement is no different to accumulation and we’re all working towards that. But then over here we’re saying, well do we leave retirees unprotected or not getting the benefits of a performance test.”

Various parts of the industry have raised concerns about this expansion and whether the spirit and benefits of an accumulation test on mass market products can be applied to personalised products.

The advice sector has also sought to get ahead of an impending performance test and Adviser Ratings launched the SMA Standard to bring some consistency and transparency to managed account reporting.

North general manager for managed portfolios and investments David Hutchison said there are many different goals and objectives that need to be factored into quantifying retirement.

“To what extent does income, in terms of dividends or distributions really matter? To what extent does risk volatility matter? To what extent are you thinking about longevity? They are different things that you need different solutions for.”

Hutchison pointed to ASIC’s Regulatory Guide 779 – Superannuation choice products: What focus is there on performance? – which says performance of options should be assessed against their goals and objectives.

“The trouble with that in a performance test is that means you have to have much, much more goals than what you have in the test today,” Hutchison said.

“Trying to construct that as a test is just incredibly complicated, if not downright confusing to the consumer and they’re not going to understand what’s going on and not get a right outcome and make right decisions.”

Bec Wilson, author of How to Have an Epic Retirement and co-founder of the Epic Retirement Tick done in conjunction with Chant West, said consumers don’t follow the details of the performance test.

One of the reasons Wilson helped launch the tick was because it presented information in a way that was easier for the general public to understand.

“We needed a repetitive education framework that people could then take away and for their own language to ask questions against, because they’re not even being given the evaluation tools to ask their adviser what ‘good’ is,” Wilson said.

Wilson said performance tests have been good at cleaning up industry behaviour.

“With the accumulation performance test, superannuation has become quite homogenous on performance and fees,” Wilson said.

“[They’re] almost replicas of each other and once they get to a certain point, they don’t need to keep trying to force costs down, they actually all kind of arrive at a sensible norming together.”

*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, publisher of Professional Planner.