Funds slam ‘simplistic’ MySuper benchmarks

The chief investment officers of major super funds want proposed investment benchmarks for MySuper accounts revised.

The chief investment officers of major super funds want proposed investment benchmarks for MySuper accounts revised.

The chief investment officers of major super funds with some $500bn in funds under management have called on the federal government to revise proposed investment benchmarks for MySuper accounts, announced in the October budget.

In a joint letter to federal Treasurer Josh Frydenberg, sent this week, the fund managers argue that the benchmarking framework announced as part of a broader “Your Future, Your Super” package, which is set to come into force from July 1 next year, is “simplistic” and could prevent fund managers taking strategies to reduce risks.

Signatories to the letter, who are asking for a meeting with Mr Frydenberg to discuss their concerns, include the chief investment officers of UniSuper (John Pearce), Hostplus (Sam Sicilia), HESTA (Sonya Sawtell-Rickson), Aware Super (Damian Graham), REST (Andrew Lill), Telstra Super (Graeme Miller), MTAA Super (Dr Ross Barry) and Statewide Super (Con Michalakis).

They also include Rachel Farrell, the chief executive of JPMorgan Asset Management; Brett Jollie, the managing director for Australia of Aberdeen Standard Investments; Paul Hennessy, managing director of the Capital Group Australia; Aisling Freiheit, the head of Australia for Wellington Management; and Kylie Willment, the chief investment officer for the Pacific for Mercer.

“Investment officers are very concerned at the so-called benchmarking methodology and the performance tests,” Martin Fahy, the chief executive of the Association of Superannuation Funds of Australia (ASFA) told The Australian on Tuesday.

He said the approach outlined in the budget was not in line with best practice in the fund management industry.

He said the investment managers did not disagree with the federal government’s aim of improving outcomes for super fund members but “this is not a good way to achieve it”.

The new system is aimed a benchmarking the performance of the $730bn low-cost MySuper sector, which has grown rapidly since its launch in January 2014.

Under the plan announced in the budget, super fund regulator the Australian Prudential Regulation Authority will finalise benchmarking tests for MySuper funds by September next year, with the trustees of “underperforming” super funds required to notify their members by October 1 next year.

Sam Sicilia. Picture: Aaron Francis/The Australian

Funds which are deemed by APRA to have underperformed the benchmark indices for two years in a row can be blocked from taking in new members.

The signatories to the letter, which range from major industry super funds to retail super fund managers, say they support the federal government’s goal to maximise the retirement savings of all Australians but warn that the benchmarking methodology announced and the underperformance tests would have “unintended consequences” for the way superannuation is invested in Australia, which could be “contrary to delivering good member outcomes”.

Concerns include the development of an infrastructure index which was made up mainly of North American infrastructure assets, which the fund managers warn could mean lower allocation to infrastructure in Australia by super fund managers.

The scheme also includes a property index, which the fund managers say is “dominated by a small number of property developers who have a fundamentally different risk profile than owners of property assets.”

The letter comes amid increasing concern in the $2.9 trillion superannuation industry over the potential significant fallout from the plans announced in the budget to weed out chronically underperforming super funds whose performance falls below specific benchmarks.

The federal government has said it wants to set out a “demanding benchmark” for fund managers of the MySuper sector.

But fund managers have privately expressed concerns about the unintended consequences of the move by the federal government, which could become involved in directing super fund investments.

Concerns have arisen that a move to benchmarking super fund performance could lead some managers to play it safe and hug the specific indexes announced, rather than take some market risks to get a better outcome for their members.

It could also deter managers from adopting defensive investment strategies which could be better for super fund members approaching retirement.

Signatories to the letter say that the proposed indices for unlisted assets “will lead to a lower level and a different mix of investment than is optimal for long-term returns” and would also have “broader implications for the Australian economy”.

They said the proposed infrastructure index is comprised of 80 per cent of assets in North America, with a concentration in railways and electricity generation.

“A shift towards this allocation is likely to lead to lower levels of domestic infrastructure investments by funds,” they warn.

They warn that the unlisted property index “is likely to lead to lower investment in real commercial property assets”.

The managers argue that the benchmarks do not provide any scope for managers to “invest more defensively within asset classes”, which they say could “unintentionally compromise” investment strategies designed to reduce or manage market risks.

Instead, they say the federal government should consider adopting international best practice by using the same approach by which it measures the Future Fund, whose return target is linked to the consumer price index.

This would allow the funds much more flexibility.