New research from Conexus shows that as super funds focus on passing the annual performance test to avoid the “strong penalties of failure”, the opportunity cost to consumers will be some $3.3 billion every year.
“We felt compelled to explore how the constraining impact of the YFYS performance test on the investment strategy of super funds would flow through and impact consumer outcomes. Unfortunately, the results of our research reveal a large adverse outcome to consumers. I’m sure this isn’t the intent of the policy,” said Conexus executive director David Bell.
“If anything, we are worried that we have understated the opportunity cost to consumers since we have ignored the restrictive impact the test design will have on the ability to manage portfolio risk.”
The opportunity cost arises from the constraints super funds will face around portfolio construction, with funds finding it harder to diversify and manage ESG risks while still trying to meet the new performance benchmarks.
“The YFYS performance test is well-intended but the design requires improvement. The intention of the test can be achieved without many of the adverse impacts generated by the present design. Some well-considered modifications would have a large positive impact,” Mr Bell said.
Conexus previously found that the YFYS laws would mean funds had to limit their total exposure to areas such as unlisted property and infrastructure to around 10 per cent – sectors to which funds currently allocate more than 20 per cent of their portfolio – in order to have a higher likelihood of passing the performance test.
“If trustees continue with their current investment strategy, they expose themselves to a reasonable likelihood of failing the performance test at some point, simply through the short-term randomness of returns,” Mr Bell said.
“These trustees would also face the prospect of having to modify their investment strategy in response to short-term performance, creating transaction costs while inadvertently reducing their ability to invest for the long-term.”
The research has been reviewed by Frontier, JANA, Mercer, Rice Warner and Willis Towers Watson.
