Choice funds now face YFYS performance test

Choice superannuation products will be the subject of the Your Future, Your Super (YFYS) performance by as early as August with the Government having cleared away the remaining obstacles.

The extension of the YFYS performance test was placed on hold pending a Treasury review of the YFYS regime, but a legislative exposure draft resulting from that review makes it clear that the performance of so-called ‘choice’ products will now be assessed by APRA in similar fashion to MySuper products.

Worth noting is that as a result of the MySuper performance there were multiple fund mergers and exits after 13 funds were deemed to have failed the inaugural test and seven were subsequently named as having failed twice.

The Government’s response to the YFYS review made clear that it remained committed to the performance testing of superannuation funds and the extension of the testing regime to choice products.

The response, released by the Assistant Treasurer and Minister for Financial Services, Stephen Jones stated: “Performance testing is imperative for the superannuation system. Trustees must be held to account for the investment decisions made with members’ funds.”

“Members should have confidence that the return on their savings will be maximised to support a dignified retirement. The performance test will apply to trustee‑directed products (TDPs) [choice] for the 2023 testing period, increasing the number of products in which Australians are invested that will be subject to performance testing.

The legislative exposure draft describes trustee-directed products in the following terms: “Broadly, trustee-directed products are accumulation choice products with strategic asset allocations to more than one asset class where the trustee or a related entity has control over the design or implementation of the investment strategy of the product”.

The Government has reflected the strong feedback it received from superannuation funds by changing the look-back period for the performance test and recognising the importance of insurance inside superannuation.

Its response document said “the performance test will be fine‑tuned with updates to the benchmarks that can be implemented within the timeframe for the 2023 testing period”.

“The lookback period will also be progressively extended from eight to ten years which will help to reduce short‑termism and support investments that can generate strong returns for members over a longer time period. The Government will give further consideration to other changes that may be necessary to improve fund performance.”