Industry funds keen to stop ‘failed’ funds member leakage

Superannuation funds which fail the Your Future, Your Super (YFYS) performance test become less attractive as merger partners if significant numbers of their members jump ship, according to Industry Super Australia (ISA).

That is why the industry funds group wants the regulators to pave the way for ‘failed’ funds to safely outline merger discussions at the same time as they are communicating to those members that their existing fund has failed the performance test and suggesting they find a new fund.

Such a move would effectively limit member leakage while successor fund transfer (SFT) negotiations are underway.

The ISA is recommending to the Australian Prudential Regulation Authority (APRA) that when in communications with members about failing the performance test, funds should be able to include information about an agreed if there is a reasonable expectation that the merger will take place in the next 12 months.

In its submission to APRA, Industry Super Australia said it was not suggesting that a successor fund transfer (SFT) represented an excuse to avoid current legal obligation with respect to funds failing the YFYS performance test.

“But we consider that information about an upcoming SFT is relevant to a member’s investment decision in relation to its superannuation product as information about the test failure,” it said.

“Member choice is not a goal in itself but a tool to realise the social policy objectives of the superannuation system. In that context, and considering the well-established facts about engagement, behavioural biases, cognitive limitations, and low financial literacy, members should be provided with relevant information in relation to upcoming transfers to better performing, high quality funds,” the ISA submission said.

As well, ISA also wants successor funds to be allowed to communicate with members of ‘failed funds’ without breaching the anti-hawking provisions.

It has recommended that the Australian Securities and Investments Commission provide guidance to clarify that a successor fund that provides information about an SFT to a transferring fund would not breach the hawking prohibition where there is a reasonable expectation that the SFT process will be completed in the next 12 months.