Financial Services Council wants super performance tests delayed to avoid ‘angst’

The Financial Services Council has requested more time for the $900bn Choice superannuation sector to be covered by product performance tests.

The Financial Services Council has asked for more time for the $900bn Choice superannuation sector to be covered by the Your Future, Your Super product performance tests, with a proposed start date in 2024.

In its submission to the review of the tests, the council, whose members include major retail super funds, argues that the Choice sector is much more complex than the MySuper sector, which has been covered by the YFYS comparative investment performance tests since July last year.

It also argues that most people who have opted for Choice superannuation products issued by retail super funds have done so as a result of advice from financial planners.

FSC chief executive Blake Briggs said the proposed extension of the YFYS performance testing regime to the Choice sector, with the new proposed start date of July 2023, would lead to “significant consumer harm” as well as “angst” for financial advisers involved in the sector.

The FSC submission argues that the extension of the YFYS performance test beyond the current low cost MySuper sector should be “done in a way which reflects the fundamentally different role” of the investment options available to consumers who have opted for Choice products.

It says Choice products often had a much wider number of investment options than the much simpler default MySuper products.

Super fund wrap platforms typically had more than seven different investment options, with retail master trusts having more than three.

The submission says that 99 per cent of people who had Choice super products offered through retail market trusts or platforms had done so as a result of financial advice.

“Extending the performance testing methodology to non-MySuper investment options blindly would unfairly discriminate against advisers and consumer directed investment strategies and goals,” Mr Briggs said.

The YFYS regime was originally due to be extended to apply to the Choice sector from July this year.

Announcing the review, assistant Treasurer, Stephen Jones, said the extension of the regime to the Choice sector would be delayed by a year, to start in July 2023.

The council argues that any extension of the performance testing into the Choice sector should “recognise the role of consumer choice and financial advice” in the system and be done in a way which was “appropriately calibrated to account for the differences in consumer engagement and industry practice.”

It argues that any extension of performance testing to the Choice sector should only be done 12 months after the passage of legislation currently being considered as part of the review of the YFYS testing regime announced by the Labor government.

The council argues that the extension of time into 2024 for the regime to apply to Choice products would allow the superannuation industry to implement the changes needed.

It would also allow comparative performance testing over a 10-year period.

Mr Briggs said the Your Future, Your Super reforms in the MySuper segment of the market were “fulfilling their purpose of increasing member engagement, reducing fees — particularly in relation to duplicate accounts and insurance — and holding trustees to account for the decisions they make.”

He said the regime, which uses a series of benchmarks chosen by APRA to assess the investment performance of products, had been successful in lowering fees in the sector.

The average administration and expenses fee had been reduced from 36 basis points to 32 basis points in the 12 months leading up to the start of the first MySuper performance test in July 2021.

The median fee had fallen from 33 basis points to around 27 basis points in the 12 months leading up to the second MySuper performance test in July this year.

But the Council argues that the system needs to involve the use of a broader range of benchmarks.

It argues that the current benchmarks used for performance tests “have imposed unintentional constraints on the investment decisions of trustees, which are creating more risky, less diversified and lower returns portfolios.”

It says these pressures have been exacerbated by the recent volatility in financial markets.

The submission argues that there should also be capital gains relief for the transfer of superannuation products and options within a fund.

It says there were currently almost 600 different products in the superannuation Choice sector, covering 9,000 distinct investment options.

It argues that the extension of capital gains tax relief for people moving between products would help to “remove underperforming investment options.”

The FSC submission also argues that the Federal government should maintain the current requirement that super funds be required to act in the best financial interests of their members.

The Albanese government has hinted that it could consider relaxing the interpretation of the requirement.

Mr Briggs said there had not been any “demonstrable evidence of any unintended and undesired consequences following the introduction of the duty.”

“Superannuation trustees should be able to demonstrate that their decisions are promoting their members’ best financial interest,” he said.

“Simply excluding this requirement for expenditure or activity below an arbitrary threshold would be inconsistent with this obligation and introduce unnecessary complexity into the regime.”