Govt urged to totally rewrite super performance test methodology

The Government needs to go further than just providing a supplementary superannuation fund performance test for faith-based products, and initiate an appropriate rewrite of the entire performance test to cover all types of investing.

In what represents a de facto vote of no confidence in the current performance test methodology being utilised by the Australian Prudential Regulation Authority, a major superannuation fund body has urged an overall rewrite.

The Association of Superannuation Funds of Australia (ASFA) has even suggested that the approach of subjecting faith-based products to a ‘supplementary’ performance test simply represents a device to minimise APRA’s workload.

Further, it said that having a ‘supplementary’ test may give rise to the suggestion that a superannuation product had ‘failed’ the initial performance test but had then been granted special treatment in the form of a concession.

The ASFA submission argued that there should not be a carve-out for faith-based products or other values-based products.

“In particular, from a theoretical perspective, if there is acceptance of the premise of benchmarking in the first place then there should be only one, appropriately constructed, benchmark against which any such assessment is made,” the submission said.

“If products are to be assessed on whether they have delivered an appropriate outcome to members, any measurement of success should reflect any ‘values-based’ or ‘principles-based’ objectives underlying the product’s investment strategy, including any decisions to filter or screen investments on a specified basis.”

“If a product has made a ‘values-based’ or ‘principles-based’ decision not to invest in one or more assets then it is not appropriate to assess that product against a benchmark that includes the performance of those assets. Instead, the benchmark should be adjusted by removing those assets and the product assessed against the adjusted benchmark.”

“By way of example, if a product has decided not to invest in tobacco products, or armaments, or gambling, because of the deleterious effect on public and individual health, the relevant benchmark(s) should be adjusted by removing the performance of those products from that benchmark,” the submission said.

“Further, establishing a paradigm in which a product ‘fails’ the original, unadjusted, performance test, and is then assessed against a ‘supplementary’, adjusted, performance test, creates the impression that the product has ‘failed’ but has been granted special treatment, in the form of a concession, to be assessed against another test,” it said. “We submit that this should not be the case – instead a product should be assessed against a single, appropriate, benchmark in the first place to determine whether it has succeeded in delivering appropriate outcomes to members.”

“Accordingly, we suggest that, in lieu of a ‘supplementary’ performance test, ‘values-based’ or ‘principles-based’ products should be assessed against a performance test that has been adjusted to take into account the filters/screens that the trustee has put in place and whether that product has passed or failed in delivering appropriate outcomes to its members is determined on the basis of that assessment.”