Govt-appointed experts warn against extending super performance test

Mike Taylor

Managing Editor/Publisher, Financial Newswire

16 January 2023

The Federal Government may not rush to extend the superannuation performance test to Choice products in circumstances where its expert working group has expressed concerns that the failings of the existing MySuper test may be magnified in the choice environment.

What is more, there have been suggestions from within the expert working group that choice products should not be subject to the same consequences of failure as MySuper products.

As well, meetings of the expert working group have laid the groundwork for the Government to strategically amend the performance test methodology including extending the problematic eight-year lookback to 10 years.

The Government is expected to move for changes to the performance test regime the the first half of this year.

A Treasury outline of the discussions of the expert working group noted that members had raised “several concerns regarding the extension to Choice products” noting that the extension was legislated to commence this year.

It said those concerns included:

• The unintended consequences in MySuper will become magnified once the test moves to more concentrated Choice portfolios.
• Ambiguity regarding the definition of a TDP may lead to some single-sector products being captured and returning false positives.
• Some TDPs are controlled by a connected entity without the input of trustees. This will prevent trustees from improving product performance in the case of poor test results. Noting that “a prominent suggestion proposed by members was to delay or halt the extension to Choice products, however the group recognised this may not be achieve other policy goals”.

It said that others had suggested:

• Adjusting consequences of test failure for Choice products, in particular removing the failure consequence and limiting to disclosure for members.
• Making disclosure notice for Choice members in case of failure more nuanced.
• Increasing the failure threshold from -50 basis points to -200 basis points.

On the question of the lookback period in the methodology, the Treasury said some members of the expert group had argued the eight-year horizon was too short and was encouraging short-termism in investment decisions and inhibiting innovation.

It said there was general feedback from members that increasing the lookback period would help reduce the unintended consequence of short-termism but that there were trade-offs to increasing the number of years.