The proposed legislation around benchmarking for the superannuation sector leaves no room for redemption, Rice Warner has warned the government.
The Your Future, Your Super reforms, as declared within the government’s federal budget, include super account stapling to prevent the creation of multiple accounts for members and a comparison tool for consumers called YourSuper, which will publish fund performance and expenditure.
It has also proposed that from July, APRA begin to conduct benchmarking tests on the net investment performance of MySuper products. If funds fall short of the benchmark, they will be required to notify their members after one year and if it continues to underperform after two years, they will be barred from receiving new members.
The move has built upon APRA’s previous benchmarking of the sector across factors such as performance and fees in its heatmaps, which the regulator began publishing in 2019.
Although Rice Warner has stated it supports the goal of eliminating underperformers in a submission to the Your Future, Your Super package, it has also warned funds that fall short of the proposed benchmark will have no chance of recovering.
Super funds will be able to perceive now if they would fail the test in a year or two, with many being “unable to turn around their performance without taking excessive risks,” the actuary stated.
Funds that improve their investment philosophy, governance and asset allocation could still fail the test due to the weight of their past performance.
Rice Warner has questioned if it would be fair to eliminate funds if their likely future performance is expected to rise. It has called for APRA to review and monitor such cases.
Further, the submission noted some funds that fail the test due to differences in asset allocation and administration fees, may actually deliver higher net returns to members than other funds that have passed the test.
“This would be contested and would be detrimental to consumer confidence in the system and its regulatory framework,” Rice Warner said.
Meanwhile new entrants to the system will not have as long a record, so measurement of their investment prowess is feared to be subjective and unfair.
Additionally, Rice Warner reported the proposed benchmark for infrastructure has less than 3 per cent in Australian infrastructure, with concerns the standard could discourage super funds from making further allocations to the local segment.
The chief executives of IFM Investors and Mercer have also similar concerns around the benchmarking reforms.
IFM chief executive David Neal told a parliamentary committee the standard could have the opposite of its intended effect, as it shifts investment managers’ focus to keeping with the industry benchmark rather than making high returns.
Sarah Simpkins is a journalist at Momentum Media, reporting primarily on banking, financial services and wealth.
Prior to joining the team in 2018, Sarah worked in trade media and produced stories for a current affairs program on community radio.
You can contact her on [email protected].