Why the next super performance test could fail millions of Australians

Save articles for later

Add articles to your saved list and come back to them any time.

The next iteration of APRA’s Your Future, Your Super test, if implemented in its proposed form, has the potential to damage retirement outcomes for millions of Australians – the very opposite of what it is trying to achieve.

For the past two years, the federal government and APRA have rightly applied the Your Super, Your Future test to MySuper products. These are simple low-cost superannuation products designed for those who don’t make active choices about where their super is invested. They are typically balanced investment funds with a risk profile intended to deliver long-term growth for Australians over their working lives, with investment objectives broadly consistent across the industry.

It is right for the government to seek to protect these Australians by subjecting these products to a strict performance test with clear consequences. It holds the superannuation industry to account, ensures those complacent about their super are being protected and motivates strong investment returns and exposes dud funds.

The government’s latest iteration of its super performance test could have unintended outcomes.Credit: Simon Letch

This year, however, the government plans to extend the Your Future, Your Super performance test to a sub-set of what are commonly called “choice” superannuation products. As the name implies, these are products where an individual – often with the help of a financial adviser – actively makes an informed choice about the products to invest their hard-earned retirement savings.

These choice funds are tightly regulated products, with extensive disclosure requirements about their structure, fees and investment objectives. These objectives vary from fund to fund because they are designed and chosen by individuals to meet their particular financial objectives and match their risk appetite.

Yet the government and APRA appear blindly determined to apply a blanket performance test to all these products, forcing them into the same square hole, despite their very deliberate and well-communicated differences. The logic of the test simply doesn’t stack up, and the risks are considerable.

There is a genuine risk the performance test results will be wrong.

While the overarching goal is to accumulate savings for retirement, some choice investment products play a specific and important role as part of a broader investment portfolio. For example, to manage market volatility, provide a consistent income stream, or generate tax benefits such as franking credits.

Someone approaching retirement and wanting more certainty in their retirement savings might invest in a product designed to provide a specific return above inflation. During periods of strong market performance, this product could outperform its stated objective but underperform market benchmarks.

Such products would likely fail the performance test because the test is based solely on net return, which inexplicably, ignores the fundamental investment principle that with greater returns, comes greater risk. Many Australians are keen to actively and carefully manage their risk in their retirement savings portfolio, which the test would take away.

There are further pitfalls.

For many choice superannuation products, especially older products now closed to new investors, the performance test would not be determined based on the actual administration and investment fees charged to an individual. Instead, it would be based on the average or highest fee charged to a member holding an interest in the same underlying investment. This will only lead to confusion for people who are told they are in an underperforming product – where in fact their investment may be passing the government’s own assessment.

Financial Services Minister Stephen Jones has carriage of the Your Future, Your Super reforms enacted by his predecessor Jane Hume and the former government.Credit: Alex Ellinghausen

Additionally, unlike MySuper product data, which has been collected by APRA since 2013, the choice test would be based on new reporting by super funds that have not yet been subject to audit and quality assurance. There is a genuine risk the performance test results will be wrong.

Despite this risk of error, product providers would be required by law to write to product users recommending they consider moving their retirement savings to an alternative product. Even where they would be worse off financially in doing so due to tax payable on capital gains and other costs such as transaction or advice costs.

Additionally, members who move their entire balance to a different super product in response to receiving a failed test result will lose any insurance cover they hold within their current fund. They may never be able to get the same level of cover, on the same terms. Or, worse still, they may not be able to get insurance at all, depending on their health.

These are all very real issues for many Australians, for which the government and APRA appear to be wilfully turning a blind eye. They need to stop and reconsider.

Choice is not always a bad thing, particularly when it comes to investing for retirement.

Noel Whittaker is the author of Retirement Made Simple and other books on personal finance. Email: [email protected]

  • Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

For expert tips on how to save, invest and make the most of your money, delivered to your inbox every Sunday, sign up for our Real Money newsletter here.

Most Viewed in Money

From our partners

Source: Read Full Article