Treasury reviews Your Future, Your Super regime amid warnings on performance test

Labor is committed to retaining a performance test on super funds, with Treasury kicking off a review into whether those measures are affecting risk-taking behaviour.

Financial Services Minister Stephen Jones says he is committed to retaining a performance test on superannuation funds, with Treasury kicking off a review into whether those measures are affecting risk-taking behaviour.

Questions in a Treasury consultation paper released on Wednesday include whether the use of actual returns affects how super funds manage money; if the way benchmark returns are calculated unintentionally distort investment decisions or reduce choice for fund members; and what the longer-term impacts of the test on market composition might be.

But Mr Jones told an Australian Institute of Superannuation Trustees meeting that he wanted to make it “quite clear” that Labor supported the measures.

“The Labor government is unequivocally on the side of high-performing funds and holding trustees’ feet to the fire to ensure that they deliver on their performance promises,” he said.

“We want to ensure that when we’re doing that we aren’t introducing mechanisms that have unintended consequences.”

The Your Future, Your Super performance regime is just over a year old. It was to have been extended from MySuper products to the wider industry in July, a move delayed by the government.

Super funds have warned the performance test is flawed, leading to index hugging. It would see funds more focused on passing the test rather than their members’ best interests, they say.

As well as the controversial performance test, Treasury will review the other components of the YFYS reforms brought in by under the Coalition government: the comparison tool, stapling and the best financial interests duty.

The performance test takes into account factors including net investment returns, asset allocation, fees and costs. It typically makes an assessment over an eight-year period, if the fund has been established long enough.

Among the complaints from industry – both before and since the introduction of the test – are that it is too blunt a tool that does not take into account risk-adjusted returns and discourages infrastructure and sustainability-related investments, which can see money tied up for years before the start of positive returns.

Association of Superannuation Funds of Australia CEO Martin Fahy.

Martin Fahy, the chief executive of the Association of Superannuation Funds of Australia, said it was the right time to launch a review, following the second set of MySuper performance results, released a week ago.

“It’s an opportunity to make the performance test fit for purpose. We’ve now had the second set of performance results … and I think given the consolidation that it’s driven, it’s probably a good time to review it,” Dr Fahy said.

“We’ve got eight years of data coming through on it, so I think it‘s an opportune time to review and share some of the insights before we extend the performance test to other areas. And also address some of the concerns that we saw coming through.”

The review was also welcomed by Cbus chief investment officer Kristian Fok, who said it was an opportunity to strengthen the test.

“We’re looking forward to identifying opportunities to extend the performance test to all products and to strengthen the test – an important tool to weed out underperformers from the sector – while ensuring the test itself doesn’t put a handbrake on active investment and investment innovation that can deliver long-term strong performance,” he told The Australian.

Industry Super Australia chief executive Bernie Dean called for the assessment period, currently at eight years, to be stretched out further

“Clearly consumers would be better served by a longer assessment time frame and if all funds and products faced assessment – too many dud retail funds have benefited from the previous decision to shield the Choice sector from testing,” he added.

The consultation opens just days after the results of the latest MySuper performance test were made public, with four products – MySuper offerings from Australian Catholic Super, Westpac BT Super, Energy Industries Superannuation Scheme and AMG Super – forced to close to new members after failing for the second year in a row.

All up, MySuper products from five funds failed this year, with the Westpac Group Plan MySuper product rounding out the five.

The funds that fell short in 2022 collectively manage almost $28bn in retirement savings. Of the four products that failed for a second year, three were offered by trustees that are exiting the industry, given a wave of mergers and acquisitions across the sector.

Also considered in the consultation paper will be how the stapling process has been set up.

Stapling, which ties a worker to a fund for life, was put in place to prevent the creation of duplicate accounts. But some in the industry warned it would leave some workers underinsured if they moved into higher-risk jobs but remained with their original fund. “Anecdotal evidence suggests that some employers have encouraged new employees to choose a fund (including the default fund) to avoid the stapling requirements,” Treasury wrote in its paper.

Among Treasury’s questions on stapling are: to what extent are employers putting into practice processes to seek stapled fund details from the ATO; and what is the actual, or likely, impact of stapling on insurance coverage?

Mr Jones said Labor was committed to retaining stapling but wanted to review the measure. “Again, I want to make it quite clear. We are not going to be reopening the stapling issue up per se. For too long we’ve had multiple accounts eroding members’ fees through multiple lots of sets of fees and ensuring that members weren’t getting the full value of their retirement savings,” he said.

“But we understood, as the original legislation moved through the parliament, that there were going to be some consequences for the way the former government set stapling up and we want to have a look at it. We want to ensure that any of the unintended consequences … are dealt with.”

On the requirement that funds to act in the best financial interests of members, Treasury is reviewing whether the measures, particularly the related regulatory changes, are improving compliance practices in the industry.