Client solution urged for when super funds fail

The Federal Treasury has been told that it needs to come up with a workable “client-centric” solution for handling financial advice clients who are left stranded in funds which fail the superannuation performance test.

Recently-released submissions to Treasury’s consultation process around possible changes to the Your Future Your Super performance test have revealed that Australia’s two leading specialist research and ratings houses hold concerns about the current regime and its impacts.

Lonsec-owned SuperRatings used its submission to argue that a key area requiring greater attention “is the fact that there may be agency relationships that are not simply reconciled against the test”.

“With the significant attrition of advisers in the industry, coupled with significant numbers of previously advised clients, there needs to be far greater clarity around a workable solution for those previously advised clients who are now in a product that fails the test,” it said.

“Potentially having a previously advised client stranded in an underperforming product and facing the need for further advice triggered by a test failure cannot be the optimal solution.”

“For licensees and advisers, there needs to be a workable client-centric solution that enables members to be cost-effectively moved to a substitute solution that better meets the requirements of the test,” SuperRatings said.

Importantly, both SuperRatings and its Zenith-owned competitor, Chant West expressed concern that the current test can produce results which incorrectly identify a fund as underperforming despite it providing good member outcomes.

As well, both businesses suggested that superannuation funds had become comfortable with the existing performance test regime.

On the question of good funds falling foul of the regime, SuperRatings suggested the value of a qualitative overlay being applied by the Australian Prudential Regulation Authority (APRA) noting that “there have been clear cases where the test has resulted in extremely adverse outcomes due to ‘edge cases’”.

“This would have benefited from greater discretion,” it said. “This is a small sample set of funds that would be impacted. An approach with broader coverage of the market with some discretion is better than a test with narrow coverage and no discretion. The latter lacks alignment to the market over time and will result in an incentive to move members/clients outside the purview of the test towards less scrutinised products.”

For its part, Chant West said the existential threat of failing the performance test had led some funds, especially those close to failing the test, to focus more on passing the test in the current year rather than long-term returns.