Making targeted amendments to the performance test for super funds could address some of the current constraints with the test that prevent super funds from investing in certain types of assets that perform well over longer time periods, according to industry bodies.
Following the conclusion of the economic reform roundtable on Thursday, Treasurer Jim Chalmers confirmed that the government would review the superannuation performance test to ensure there are no unnecessary obstacles or impediments to institutional investors such as super funds investing in areas like housing.
Chalmers stressed that the government was not abolishing the performance test or in any way interfering with the sole purpose test.
FSC executive director of policy Chaneg Torres said that while the performance test has done a good job of weeding out underperforming trustees, the FSC would support changes that ensure that the performance test is fit for purpose.
“This includes looking at whether sensible and targeted changes can be made to enable super funds to invest in assets that make sense from a long term, risk-adjusted return perspective,” Torres said.
Torres said there is a strong case to suggest that super funds are currently prevented from investing in certain assets that over the long-term would deliver good returns for members.
“We would support changes that can be made to the test that enable investment in those long-term assets that deliver returns to members,” he said.
He gave an example of assets that have a high tracking error against the current benchmarks.
“Super funds at the moment are disincentivised from investing in those [types of assets] even if they make sense from a member’s best financial interest perspective as they deliver a good long-term return,” he said.
During the previous performance test review, the FSC made a range of suggestions including a CPI plus X benchmark.
“The idea behind that was that you could ring-fence a small proportion of your total assets under management, say 5 per cent, and if there were emerging asset classes that don’t neatly fit into existing benchmarks then you could put them in this flexible CPI plus x benchmark,” Torres said.
“That would still hold super funds accountable for performance but be flexible enough to allow them to invest in assets that make sense from a member’s best financial interest perspective."
The Association of Superannuation Funds of Australia has similarly been calling for changes to the performance test that ensure it is genuinely focused on outcomes for members.
ASFA chief executive Mary Delahunty, who attended the roundtable, said there had been constructive discussion around the performance test with the government and emphasise that any changes would be focused on building on good policy rather than deregulation.
Delahunty noted, for example, that there is a genuine desire for super funds to invest in unlisted opportunities where those exist at an institutional grade.
However, she noted that not all types of assets are suitable for investment by super funds so the lifting of constraints was unlikely to see superannuation money flow into areas like venture capital.
“Not every investment opportunity or asset class is going to be right for superannuation because of our long-term time horizon, capability and expertise and liability of members that we have to think about,” she said.
“If we look at early-stage venture capital, for example, there is some exposure by superannuation funds and some constraints but the lifting of those constraints is not necessarily going to see a flood of superannuation money to early stage venture capital, because it may not be appropriate.”
Delahunty said that by having good institutional investors entrenched in Australia, however, helps attract other forms of capital or other investors who are looking to invest in those types of assets.
“We can work with the government to help them understand their role in catalysing those kind of investment opportunities,” she said.
“We’re starting to have good and meaningful conversations about how we can deepen the capital pool and achieve productivity gains.”
