Actuaries want risk-adjusted super performance test

The superannuation performance test methodology needs to be changed to stop superannuation funds from benchmark hugging by injecting risk-adjusted returns, according to the Actuaries Institute.

The Actuaries Institute has told a key Parliamentary committee that the Government should adopt a two-metric approach with the second metric being risk-adjusted performance.

Actuaries Institute superannuation and investments practice committee chair, Tim Jenkins said a two-metric test would ensure trustees can continue to have confidence around decisions they’ve already made to ensure they pass the Test, while also encouraging them to pursue investments more closely aligned with the best financial interests of their members on a forward basis,

The submission said adding a risk metric would allow the Test to better cater for investments and strategies that do not naturally align with the prescribed asset classes and benchmark indices used by the Test, such as ESG-focused investment strategies.

“Like the current Test, the risk-adjusted metric should ensure sufficient weighting is placed on fees by testing investment performance after accounting for both investment and administration fees,” the submission said. “This also avoids the risk of any gaming in trustees classifying different fee types to pass the performance Test.”

The Actuaries Institute submission also recommended that while fees charged by super funds should continue to be assessed as part of the Test, a higher representative member balance of $100,000 for non-platform products and $250,000 for platform products would be more appropriate than the existing $50,000 figure as typical member balances continue to grow.

It also calls for a greater role for trustees and the Australian Prudential Regulation Authority (APRA) in how areas of choice option underperformance are understood and rectified.

It suggested the consequences for failing the Test for choice options could instead require trustees to provide to APRA an action plan to address the underperformance.