Performance test has unjustly impacted good super funds

Mike Taylor

Managing Editor/Publisher, Financial Newswire

23 November 2022

Good superannuation funds are curtailing their investment strategies due to a very rational fear of failing the superannuation performance test, according to specialist superannuation research and ratings house Chant West.

In a research paper examining the impact of the performance test, Chant West has argued that it has become an unhelpful distraction and that it should be replaced with a new test capable of gaining broad acceptable as a reasonable basis for taking significant remedial action against a fund.

Further, Chant West has proposed its own test methodology which revealed that instead of the 13 funds which failed the initial performance test overseen by the Australian Prudential Regulation Authority (APRA) only nine funds would have failed.

“Importantly, four funds that failed the YFYS test in 2021 but passed it in 2022 (AvSuper, Christian Super, Commonwealth Bank Group Super and Maritime Super) would have passed our test in both years,” Chant West said.

“Yet that first year failure meant they had to endure the consequences of the test of (a) being named as an underperforming fund and (b) having to notify their members of that fact and suggest they seek an alternative fund. In addition, there are another two funds that failed the YFYS test in 2021 and have since closed, but they would have passed our 2021 test (BOC Gases Super and LUCRF).”

Chant West has argued that its alternative test is less susceptible to the ‘false positives’ that are a recognised feature of the current test.

The research and ratings house said that it warned of the shortcomings in the current superannuation performance test and said that it had resulted in some superannuation funds making compromises to ensure they passed.

“We forecast that some funds’ ‘best ideas’ might be compromised, and we know of several instances where funds have not taken up investment opportunities that they would have taken up eagerly before the test,” the Chant West analysis said.

“Perhaps of more concern, we know of several funds that terminated diversifying strategies in 2021 because they had relatively high YFYS tracking error, when those strategies (e.g. alternatives, portfolio protection, lower volatility equities, shorter duration fixed interest) would have provided very effective protection in the FY22 investment environment when major asset sectors fell significantly.”

“While the test has identified and eliminated some funds that were clearly sub-standard and destined to fail, it has caused collateral damage to others that were seeking to do the right thing by their members but were somewhat unlucky in the timing of the first test (i.e. over seven years of strong returns). More ominously, it has driven the behaviour of the surviving funds in ways that, in too many cases, have resulted in diminished returns for their members. Those are the unintended, and unacceptable, consequences of the current test regime.”