The federal government is seeking feedback on draft regulations which set out how APRA will operate a supplementary performance test for faith-based products that fail the standard Your Future, Your Super (YFYS) performance test.
The draft regulations — which also prescribe additional information that funds must provide when applying for faith-based status — underpin legislation introduced into parliament last week that changes how faith‑based products are treated under the annual performance test.
“The performance test was introduced to hold trustees accountable for the investment performance they deliver and the fees they charge to members,” said Assistant Treasurer and Minister for Financial Services, Stephen Jones.
“These changes to the performance test seek to maintain this accountability while taking account of religious obligations.”
Currently, APRA's test measures the performance of MySuper products against an objective benchmark. Funds that underperform their benchmark by more than 0.5 percentage points are deemed to have failed and those that failed two years in a row cannot accept new members.
However, under the new legislation, if a faith-based product fails the original test, APRA will be required to conduct a supplementary performance using alternative indices.
“A supplementary performance test for faith-based products allows a product's faith-based investment strategy to be taken into account when assessing the performance of the product against benchmarks,” the government explained.
The new legislation delivers on an election commitment by the government to allow APRA to consider the religious affiliation of a super fund when applying its test.
The draft regulations note that the use of alternative indices will affect the ‘index’ variable of the performance test, which is used when calculating a product's ‘benchmark return’, while other measures including ‘actual return’ will remain unchanged.
“The ‘benchmark return’ may differ between the original and supplementary performance tests due to the use of different indices. This is the only difference between the original performance test and the supplementary performance test,” they state.
Trustees will be required to provide APRA with an alternative index or indices that can be used for the supplementary performance test when they apply for faith-based status.
These alternative indices are expected to reflect the product's faith-based investment strategy and their suitability will be considered by APRA.
Funds must also provide information that demonstrates that the product's investment strategy accords with faith-based principles when applying for faith-based status.
Additionally, the application must contain information that supports the trustee's declaration regarding the disclosure of a product's faith-based investment strategy to members through a product disclosure statement, target market determination and annual report or their website.
The government said it welcomes submissions from all interested parties as part of the consultation which runs until 7 October.
In response to earlier consultation, Industry Super Australia (ISA) argued that the differential treatment of faith-based products “potentially undermines the intention” of APRA’s test.
“In particular, it creates an uneven playing field between faith-based products and other superannuation products, including products that also apply values-based investment principles such as those that are marketed as being ethical or socially responsible,” said ISA policy adviser Anne Nguyen.
“The proposed process for applying for a faith-based exemption also appears to lack sufficient transparency and could be improved by ensuring APRA is required to publish the alternative index or indices used to assess the performance of the relevant faith-based products.”
Furthermore, ISA suggested that committing to specific changes for faith-based products ahead of the government's review of YFYS laws was "premature" and could add a layer of complexity to the review that may have otherwise been avoided.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.