A number of “material challenges” should be taken into consideration prior to any extension of the Your Future, Your Super (YFYS) performance test, SuperRatings has argued.
In its submission to the YFYS review, the superannuation research house highlighted three key areas of concern in relation to extending the test to trustee-directed products (TDPs).
Firstly, SuperRatings suggested that the current definition of a TDP requires further clarification.
“We believe that there is not a clear and consistent definition of a TDP that is understood by, and applied across, the industry. If a common understanding doesn’t exist within the industry, it has the potential to amplify confusion amongst members,” it said.
“We believe that the definition should be made as simple and consistent as possible to ensure all investment options intended to be captured as a TDP are.”
The firm stated that, in line with the view that the intention of the test is to set a minimum quality benchmark, it would like to see it applied across accumulation options as appropriate.
The possibility of options being excluded from the test through carve-outs should be avoided wherever possible, SuperRatings said, “to ensure that consumers can have confidence that the quality filter being applied is system wide”.
The Grattan Institute recently also argued that creating carve-outs for certain Choice products would be “bad policy” and increase the risk of the test being “gamed” in its submission to the review.
SuperRatings’ second area of concern relates to the type and number of asset classes that funds invest in through TDPs, which is broader than for MySuper products.
“We would recommend consideration of the appropriateness of the current range of asset classes used in the test, with additional asset classes likely to be required to reflect the diversity of investments available in TDPs,” the firm said.
“This would need to be offset against the complexity and cost of monitoring the test outcomes.”
Finally, the research house said there is some evidence that options that take into consideration areas other than returns, such as ESG, sustainability and risk reduction are being removed from the market due to issues around aligning their approach to existing benchmarks.
“The expanded test would most likely need to include some form of additional consideration or overlay to account for these factors,” it suggested.
On the current operation of the YFYS test, SuperRatings said that the impact on the behaviour of super funds has been clearly demonstrated, with increasing levels of analysis and reporting being undertaken by funds to monitor their portfolios.
However, the firm noted that the test is also increasing awareness of tracking error relative to the performance test’s benchmark indices and the need for funds to track and minimise this.
“Relatedly, there is a reduction in the willingness and ability to engage in Tactical Asset Allocation and Dynamic Asset Allocation to either enhance performance or minimise impacts due to short-term and volatility-related market movements, as this may then have a detrimental effect on the fund’s outcome relative to the performance test’s methodology,” it said.
“This reduction in willingness may be in conflict with members’ objectives for monies held in these investment options.”
The firm also argued that the “narrow” set of indices used to calculate benchmark returns has the potential to distort investment decisions and reduce choice for members. Moreover, it added that it has already observed a “material slimming” in the investment menus of funds to date.
