Should performance test be extended to retirement products?

The Your Future, Your Super (YFYS) performance test could be expanded to cover retirement products, according to Treasury’s Superannuation in Retirement consultation paper.

The paper, released on Monday, references the success of the superannuation performance test and the YourSuper comparison tool and asks whether developing similar tools in the retirement phase is practicable.

However, it points out that developing similar tools in the retirement phase would rely on better disclosure practices and would “necessarily include establishing metrics for comparison”.

“Applying performance testing to retirement products would also require careful assessment of the unique challenges present in the retirement phase, including consideration around liquidity and longevity risks,” the discussion paper said.

Importantly, it added: “A performance test for retirement products should not constrain innovation in product design”.

The Treasury consultation paper states that standardised retirement product disclosure is a way funds can help consumers have access to information on the product they purchase, compare it to others, know how well it is performing, and ensure that it meeds their needs.

There are three dimensions for information that could be disclosed:

• Characteristics of retirement products: e.g. expected income, how risks are managed, investment strategy, fees, access to underlying capital, whether it can be switched to another product and when, and death benefits or support for dependants. There may be other services or assistance that the fund provides specific to that product.
• Performance characteristics: e.g. fees, investment performance, and risk pricing and measures.
• A regular assessment of how funds fulfill their covenant obligations: as funds evolve their practices in implementing the covenant, assessments of their effectiveness can allow consumers to be better informed of the quality of the products and services funds offer in retirement and the outcomes for their members. Funds are already required to regularly review their strategies under the covenant, and the way they conduct these reviews may evolve over time alongside implementation of their strategies. However, any requirement for assessment of covenant obligations should not be overly prescriptive as it is up to funds to determine how they will implement the covenant for their members.