APRA ‘heat maps’ reveal super laggards

APRA has called out funds from Westpac, Pitcher Partners, Energy Industries Super and Maritime Super as super laggards.

Helen Rowell from the Australian Prudential Regulation Authority

The prudential regulator has called out funds from Westpac, Pitcher Partners, Energy Industries Super and Maritime Super as laggards when it comes to investment returns in the superannuation industry, as it unveiled detailed “heat maps” assessing basic products.

The Australian Prudential Regulation Authority’s new landmark ratings looked at MySuper products across the industry separately assessing fees, returns and sustainability of member outcomes. The so-called heat maps gave a detailed assessment and colour coding to identify the regulator’s concerns.

APRA also used the release to warn funds they were on notice to address weaknesses and underperformance or seek to merge or exit the industry.

The APRA analysis sparked a fierce response from some sections of the superannuation industry on Tuesday as they questioned the regulator’s methodology and assumptions.

The APRA heat map — which is colour coded so that dark red denotes lower performance and higher fees — provided an assessment of MySuper products, which are meant to be low-cost and simple superannuation options. Products coded white are performing above a determined benchmark.

Among the worst performers, on five-year net investment returns per annum as at June 30, were Pitcher Retirement at 5.85 per cent, Energy Industries Super with 6.19 per cent and Maritime Super at 6.23 per cent.

Several of Westpac’s lifecycle products — which change the investment strategy and risk appetite depending on the member’s age — scored a dark red rating on five-year performance, including BT Super for Life and the Westpac Group Plan. Five-year return numbers were not provided by APRA on lifecycle superannuation products.

Others that scored a dark red rating for performance included Christian Super, Perpetual’s MySuper product and AUSCOAL Super.

Westpac looked to get ahead of the heat map release on Monday, though, by outlining changes to its administration fee schedule for some MySuper customers from July next year, with a rebate to apply from April.

APRA deputy chair Helen Rowell said she expected all trustees to use the heat map to reflect on performance and identify areas of improvement.

“In particular, we directly contacted the trustees of the worst performing products and asked them to provide or update action plans outlining how they will address identified weaknesses,” she said. “If they are unable to make substantial improvements in good time, we will consider other options, including pressuring them to consider a merger or exit the industry.”

For disclosed fees on MySuper account balances of $10,000, among the worst performers were Goldman Sachs’ BEST Superannuation at 3.79 per cent, First Super at 1.78 per cent, the Pitcher Retirement at 1.73 per cent, IAG and NRMA at 1.59 per cent and the AMP Retirement Trust at 1.54 per cent.

Despite its high fees, BEST returned 9.63 per cent a year over the five-year period assessed by APRA. It was beaten only by the Host-Plus MySuper product with returns of 9.65 per cent.

The regulator did caution that the heat maps were not a complete picture of trustee performance, although it was a “starting point” for consideration of MySuper product performance and how to improve it.

The report did also point out some positives. Just 23 of the 263 products and lifecycle stages showed underperformance of 0.75 per cent per annum or more relative to the industry’s trend line.

APRA intends to refresh the heat map at least annually, but will update the analysis in the first half of 2020 to help trustees and stakeholders assess early improvements.

For sustainability of member outcomes, the heat map pinpointed AMP’s No 3 MySuper product as performing poorly on total accounts and net cash flows over a three-year average.

An information paper also released by APRA found that more single strategy products outperformed the investment benchmarks than lifecycle product stages.

AustralianSuper chief executive Ian Silk said the industry fund giant welcomed the initial APRA heat maps and looked forward to working with the regulator “to finesse and evolve the methodology over time”.

“Strengthening the superannuation system is of critical importance for public confidence and ultimately for the retirement standard of living that all Australians enjoy,” Mr Silk said. “Persistently underperforming funds must be removed from the industry.”

But the Association of Superannuation Funds of Australia cautioned of the potential for “unintended consequences” stemming from APRA’s methodology and the focus on three and five-year performance.

“Achieving sound investment performance and broader member outcomes is a long-term journey, it’s not measured in terms of years, it’s measured in terms of decades,” ASFA boss Martin Fahy said.

Industry Super Australia deputy chief Matthew Linden said APRA’s methodology and risk adjustment for the heat maps was not “as rigorous” as it could be, meaning some underperformers would continue to “fly under the radar”.

The Financial Services Council warned that the MySuper heat map should not be used to rank superannuation products. “It is really important to understand that the heat maps are a point-in-time analysis, which is a useful tool for APRA in its supervision activities, but it doesn’t tell the whole story when it comes to members’ retirement outcomes,” FSC boss Sally Loane said. “The heat map may tell you that other funds have had higher returns over five years, but if you’re close to retirement you might be far more concerned with how your fund is managing the risks of a market downturn to safeguard your retirement savings.”

Ms Loane noted while the FSC hoped APRA would continue to refine its MySuper heat maps, the proposal to extend the exercise to broader products was “highly problematic”. Super Consumers Australia said APRA’s heat map provided transparency on those funds at the bottom of the barrel and would help more people recognise signs of underperformance.

“It’s time for poor performing funds to look for mergers and stop inflicting any further harm on the retirement savings of Australians,” said Xavier O’Halloran, Super Consumers Australia director.

APRA said total assets held in MySuper products reached $762.3 billion at June 30, more than double the figure in the 2013-14. Total MySuper assets comprise almost 40 per cent of all assets in APRA-regulated funds.