20% of choice super products may fail performance test

Approximately 20% of superannuation fund options are estimated as likely to fail the superannuation performance test administered by the Australian Prudential Regulation Authority, according to specialist ratings house, SuperRatings.

SuperRatings noted the implications flowing from the second round of MySuper results and the likelihood that some funds will be forced to stop accepting new members, and pointed out that this would be accompanied by the testing of Choice options.

SuperRatings has conducted analysis of the industry’s performance to 31 March 2022, using its newly developed Performance Test IQ tool. Analysis was completed on over 650 options across Trustee Directed Products, including Retail, Industry, Corporate, and Government funds, excluding MySuper products.

The results from our analysis suggest that approximately 20% of options were estimated to fail the test, which allows for annualised underperformance of the benchmark of up to 50 basis points.

Breaking down the analysis further, SuperRatings found that all option types are facing challenges. In particular, options with growth assets, such as equities, making up between 91-100% of assets held were most likely to fail the test, with 26% of these options estimated as failing based on performance over the 8 years to 31 March 2022. Capital Stable options with between 20-40% growth assets are also facing a challenge to pass the test, with around a quarter of these options estimated as failing.

As the performance test captures investment returns over an eight-year period, funds have limited ability to shift their relative long-term position against the benchmark. However, with the test only accounting for the most recent level of fees charged, funds do have the ability to make fee changes to improve their performance test outcomes.