Performance test reducing super fund member choices

Mike Taylor

Managing Editor/Publisher, Financial Newswire

3 November 2022

The current indices underpinning the superannuation performance have the potential to distort investment decisions as well as reduce choice for members, according to specialist superannuation ratings house, SuperRatings.

What is more, the company has told the Treasury that the performance test methodology has already resulted in funds trimming down their investment menus.

It also told the Treasury review of the performance test that it is clear that the test is impacting funds’ behaviour leading toa reduction in their willingness and ability to engage in Tactical Asset Allocation and Dynamic Asset Allocation.

It warned this reduction in willingness on the part of the superannuation funds “may be in conflict with members’ objectives for monies held in these investment options”.

“Furthermore, the current set of indices has the potential to distort investment decisions as well as reduce choice for members. We have seen a material slimming of funds’ investment menus to date. Overall, this has provided a stronger floor to support the quality of investment options in the market; however, it has also been problematic for a number of ESG, retirement focused and tailored investment options that fundamentally have a purpose that is valid but not able to be appropriately aligned with the test in its current form.”

“While the test could be expanded to a broader range of Trustee Directed Products, including single sector options, the fundamental challenge of a single quantitative metric to solve the challenges of member outcomes is fraught, the SuperRatings submission said. “This would likely require an additional overlay, which could be as simple as how well the option performs against an appropriate peer group or its stated investment objective, but then makes it harder to have a bright line test. It would also ignore that superannuation outcomes are more than simply returns and fees. Specifically, high-quality member aligned advice and member engagement add to member outcomes in a way that is not factored into the test.’

“In relation to retirement/decumulation products SuperRatings does not consider expansion of the existing test to be appropriate. This is due to the differences in the nature and objectives of these products which are based on the unique needs of retirees, as highlighted in the Retirement Income Covenant, such as the need to draw an income from the investment, minimise investment risks and account for longevity concerns.”

“Accordingly, it is challenging to see how a single quantitative test may apply to all products. It would supply greater transparency for Choice options but would require a broader overlay to provide a workable solution across all investment options in the market.”