Performance test fail letters should recommend financial advice

Mike Taylor

Managing Editor/Publisher, Financial Newswire

8 May 2023

The mandatory letters sent to members of failed superannuation products should advise them that it would be appropriate to seek financial advice before selecting an alternative product.

As well, it is being suggested that the letter contain the same admonition included in Australian Securities and investments Commission guidance around investment performance – that “past performance is not a reliable indicator of future performance”.

Those are two of the key recommendations of a submission responding to the Government’s proposed changes to the Your Future, Your Super (YFYS) performance test, with the Association of Superannuation Funds of Australia (ASFA) suggesting the current letter falls short of the mark.

“The draft letter should be consistent with the current requirements on funds regarding their communications with members. Indeed, to the degree that the letter is inconsistent, it risks undermining the policy intent of the regulatory requirements,” the submission said..

“ASIC guidance for promotions and advertising with respect to investment performance requires a statement to the effect that ‘past performance is not a reliable indicator of future performance’. This concept should be incorporated explicitly and implicitly in the letter.”

“The ATO approved rollover/transfer request form contains warnings about the potential impact of a rollover/transfer on member benefits, and costs to members. With respect to the former, this is particularly relevant to insurance benefits. Costs to members can include tax payable from realised capital gains events and due to buy/sell spreads. The proposed letter contains the phase: “Switching super products is easy and there are no fees.” This implies that switching is costless, which is not necessarily the case as per above.”

The submission said the letter does not provide sufficient guidance regarding the factors that a member would need to consider when making a decision to switch.

“With respect to the decision to switch, the text of the letter states that the ‘letter does not take your personal situation into account. You should think about your investment plans and personal situation, including insurance, when switching’.”

“The letter should state that it may be appropriate for members to seek financial advice when considering whether an alternative product would better suit their retirement goals. This is particularly relevant for a member who might have other investment options with the fund,” the submission said.

Dealing with life-cycle products and options with multiple pathways, the submission said that the proposed wording in the draft letter for a product/option that had failed the performance test was “potentially confusing/misleading for members who hold options that have multiple pathways”.

“The proposed form of the letter would mean that a member in a pathway that would have passed the performance test if assessed separately would receive a ‘fail’ letter (recommending they consider a different product) if the weighted-average fails the test,” it said.