Choice super funds perform worse and have higher fees than MySuper funds: APRA report

Choice funds are twice as likely to be duds than MySuper peers, with one product returning just 1 per cent per year over five years.

The median admin fees of choice products were 40 per cent higher than MySuper products, APRA said.

The prudential regulator has fired a warning shot at super funds over their dud choice products, after it found these ‘choice’ funds performed worse than their MySuper peers, while charging members higher fees.

As part of a broader crackdown on the industry to weed out the underperformers, the Australian Prudential Regulation Authority has been scrutinising the ‘choice’ sector ahead of the release of its first heatmap on the segment later this year.

It follows the regulator publishing similar heatmaps on default MySuper products since late 2019.

APRA’s analysis of the sector found choice products were twice as likely to be duds when compared to MySuper funds. These choice funds are also slugging members with fees that are 40 per cent higher than the default options.

As much as 15 per cent of choice products underperformed a risk-adjusted, peer-derived benchmark by more than 75 basis points, compares with 7 per cent of MySuper products, APRA found.

Choice products, which account for nearly half of all APRA-regulated superannuation member benefits, are products that members have actively chosen to join, as opposed to those who are defaulted into MySuper products.

There was also extreme variation in outcomes between choice investment options even when the allocations to growth assets were similar, the regulator found.

For those workers unlucky enough to be tied to the worst of the lot, they saw annual returns of just 1 per cent over the past five years, despite their savings being invested in a growth option.

In the 70-80 per cent growth allocation band, investment performance ranged between a dismal 1.05 per cent per annum to 8.60 per cent per annum over the five years, APRA said.

APRA executive board member Margaret Cole said the findings demonstrated the importance of exposing and addressing underperformance among choice products.

“Transparency is a powerful tool for lifting standards and weeding out underperformers. Since the first MySuper Heatmap was published, 11 funds exited the industry between December 2019 and December 2020, while members have saved a total of $408m in reduced fees.

“Historically, the choice sector’s complexity, variety and sheer volume of options have helped to shield poorer performers from scrutiny.

“By shining a light on choice products that are failing to deliver quality, value-for-money outcomes, APRA expects to see the same types of improvements for the 34 per cent of member accounts in the choice sector,” Ms Cole said.

AIST chief executive Eva Scheerlinck said APRA’s findings confirmed underperformance was a serious problem in the choice sector.

“While Choice products are defined as products that members have actively chosen to join, we know that many people are ‘sold’ into them and remain in the dark about how their super is performing,” Ms Scheerlinck said.

The regulator warned the duds they would be named and shamed in the coming weeks when the new heatmap is released.

“APRA will use the Choice Product Heatmap to expose those choice products that are failing members by charging high fees and delivering poor investment returns,” it said in its report.

“Trustees should consider the information in the Choice Product Heatmap and what it may indicate about the potential result of their trustee directed products in the upcoming performance test, which APRA will finalise at the end of August 2022.”

The underperformers will be closely watched, APRA said.

“Trustees that have choice products that are underperforming will face increased scrutiny from APRA. Trustees will be required to identify the root cause of their underperformance and take appropriate action to improve performance going forward.”

The regulator identified 568 choice products within APRA-regulated superannuation funds, offering approximately 9000 distinct investment options and about 43,000 investment options in total.