In its latest submission to the Treasury’s Your Future, Your Super (YFYS) review, the Association of Superannuation Funds of Australia (ASFA) has argued that the current make-up of the MySuper test challenges ASIC’s rules regarding past performance.
Namely, according to ASFA, the backward-looking nature of the test directly opposes ASIC’s regulatory guide devoted to the use and disclosure of past performance — a guide that addresses the issue of good past performance being an unreliable predictor of future good performance over the medium to long term.
“In line with this, providers of financial investment products are required to issue consumer warnings to the effect that ‘past performance is not a reliable indicator of future performance’,” ASFA explained in its submission.
“There were two MySuper products in 2021 with an identical future investment strategy — one passed the test and the other failed. Obviously, investment performance can only be assessed in arears; however, this serves to reinforce that the test is not about future member outcomes but instead about past performance,” the body noted.
Speaking to InvestorDaily, ASFA said the performance test is a ‘line-in-the-sand’ test, with a binary pass or fail, and only measures one metric of investment performance — the return of each asset class, measured against an index for that asset class, based on the asset allocation of the product.
“This means that the performance benchmark for every product is different, as each product has a different asset allocation,” ASFA said.
“Assessing the return of each asset class against an index for that class does not measure the effectiveness of the product’s asset allocation, considered to be the most significant determinant of investment returns,” it continued.
Ultimately, the body said, the outcome for a member is a function of the returns credited to their balance, yet the test does not measure the product’s absolute or relative returns.
“By definition, any measure of performance must be of past performance. Past performance, however, is not a reliable indicator of future performance,” the body reiterated.
Given the above, ASFA said it would like to see two improvements made to the performance test.
“Ideally, the test should encompass more metrics with respect to investment performance, including a measure of returns relative to peer products, and trustees who fail the performance test by a specified margin should have the right to state their case to APRA as to why the product should continue to be treated as a performing product,” it said.
“APRA would have regard to such factors as recent investment performance; changes in structure or business operating model; improvements in investment governance, risk and/or compliance management and expenditure on such things as ITC applications designed to improve investment processes.”
In its submission to Treasury, ASFA also raised concerns regarding the ability of failed funds to find merger partners.
“In some cases, successive failures of the performance test may reduce the likelihood of a fund merging as the loss of members in response to the letter and the inability to accept new members reduces the appeal of the merging fund and impedes the best financial interests analysis of the potential successor fund,” it said.
To date, concerns regarding the YFYS test have been raised by many, including most recently by Chartered Accountants Australia and New Zealand (CA ANZ) and CPA Australia. Just this month, the accounting bodies argued that the system is probably “being gamed”.
“We are already seeing evidence of this unfortunate aspect.”
Others, like the Conexus Institute, have said that the controversial test is significantly constraining the investment strategies of super funds and restricting them from constructing portfolios that meet member interests.
