AustralianSuper calls for universal benchmark to test funds

AustralianSuper is calling for a universal benchmark to be used when testing the net returns of super funds, rather than measuring them against asset-class-specific benchmarks.

AustralianSuper is calling for a universal benchmark to be used when testing the net returns of super funds, rather than measuring them against asset-class-specific benchmarks.

The $280bn pension fund says that plans to introduce more benchmarks under draft changes to the Your Future, Your Super testing regime, will allow more focus on “hugging” the index for a given asset class, rather than on net returns.

“Under the proposed regulations, the performance test continues to measure how well a fund has implemented its own strategy, not whether the strategy is effective in generating strong returns for members over the long term,” AustralianSuper acting chief strategy officer Mark Comer said in a submission to Treasury.

Introducing more asset classes and benchmarks to the tests would transform it into a “granular attribution exercise” where each fund compares itself against a self-defined and strategic asset allocation.

“Actual net performance over a long-term period (such as 10 years) against a universal industry benchmark (tailored to the respective product type) would be a far better approach, … testing all aspects of an investment strategy – i.e. asset allocation, portfolio construction and security selection,” the submission said.

“Under the proposed changes, the test becomes increasingly anchored in just security selection, which is generally the least important of the three aspects for generating net member returns.”

The super testing system has exposed underperforming funds and encourages them to improve or leave the industry. It has resulted in major consolidation of the sector and led to the creation of mega superannuation funds.

But the test, administered by the Australian Prudential Regulation Authority, which has the potential to stop underperforming funds from accepting new money, has received criticism from the industry for its potential to discourage funds from investing in areas that did not meet the performance of specific benchmarks including green and ethically driven investments.

The regime initially applied to the default My Super option products but is set to be expanded to the Choice sector – funds that are actively selected by workers for their pension – in July this year.

AustralianSuper’s submission, which was submitted jointly by Mr Comer and corporate affairs officer Chris Cramond, also calls for retirement products to be tested and for more consistency on how fees are accounted for in the tests.

“The performance of retirement products is particularly important given a member in retirement does not have an extended period of time to build savings like a member earlier in their working life,” the submission said.

The fund said it was “not aware” of any compelling rationale for the performance test to only apply a one-year time frame for administration fees.

“Net benefit is what is most important to outcomes in members’ best financial interests. The one-year time frame for administrative fees represents an inconsistency at the heart of the performance test. It makes the performance test less reflective of strong long-term performance in generating net benefit for members.”

The Albanese government released draft changes to the regulations last month and its consultation period closed May 2. It will provide an update before the next performance test in August this year.