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New data shows how many Choice super products would have passed APRA’s performance test

3 minute read

The government has delayed the inclusion of trustee-directed products in the test.

SuperRatings has estimated that nine out of 10 Choice options would have passed APRA’s annual performance test had it been expanded beyond MySuper products this year.

Based on data to the end of June, the firm found that 93 per cent of balanced options would have received a pass, including 69 per cent that met or exceeded the benchmark and 24 per cent that underperformed by 0.5 per cent or less as allowed under the test.

The findings are an improvement on previous analysis by SuperRatings which estimated that 17 per cent of balanced options, and around 20 per cent of Choice options overall, would fail.

“The volatile market over the second half of the financial year emphasised the importance of diversification and long-term strategy within superannuation investments, as funds experienced unique conditions relative to earlier periods in the eight-year assessment,” commented SuperRatings executive director Kirby Rappell. 

“The shift in the proportion of options passing the test also highlighted the impact a single quarter can have on reported performance test outcomes. 

“Despite the limited ability of funds to improve upon eight-year performance over a short period of time, those who are close to failing the test need to ensure they position themselves as strongly as possible, as the rolling nature of the test means the test result is impacted by both performance today and from the same period eight years ago.”

Last month, financial services minister Stephen Jones announced that the government had paused the extension of the test for 12 months to review the operation of the Your Future, Your Super (YFYS) laws.

“Funds must always be held accountable for their performance. In doing so, accountability mechanisms must not simultaneously create perverse or unintended outcomes for members,” Mr Jones said as part of his announcement.

“The government is aware of concerns that the YFYS laws have the potential to create such outcomes by discouraging certain investment decisions or certain infrastructure investments.”

Mr Rappell noted that the review would provide funds with extra time to ensure their broader suite of offerings are in line with the expectations of the government and the regulator.

“Of particular interest to the review should be that two funds which failed the test last year produced returns within the top 10 MySuper products for the 2021-22 financial year,” he said.

“We expect that some products will likely fail the test a second time when the results are announced in late August, triggering the prevention of new members from joining these products. However, with 10 of the 13 MySuper products that failed last year’s test having announced or completed mergers to date, the impact on members is expected to be minimal.”

While 90 per cent of all Choice options would have passed the test this year based on SuperRatings’ estimates, high growth options (85 per cent) and capital stable options (88 per cent) were found to be comparatively more likely to fail.

Allocations to unlisted property, diversified fixed interest, Australian and international shares were identified as being the biggest drivers of whether or not an option passed the test.

SuperRatings indicated that, despite the government’s review, it still believed the performance test was, in some form, here to stay.

“We suggest providers remain focused on meeting their long-term strategic objectives in a manner that is consistent with passing the test,” Mr Rappel said.

“Of particular importance will be the impact of historically strong performance, given the rolling nature of the test and the short-term outlook around increased volatility and lower expected returns.”