Labor has pledged to address several unintended consequences of the Your Future, Your Super (YFYS) performance test identified as part of Treasury’s review into the YFYS laws.
The outcomes of this review were published on Tuesday alongside exposure draft regulations that outline planned updates to the test. Key changes identified by the government include:
- Prospectively increasing the testing period from eight to 10 years to encourage longer‑term investment decisions.
- Calibrating key benchmarks to ensure that funds are not unintentionally discouraged from investing in certain assets.
- Adjustments to the notification letter that trustees of failed products send to members.
- Minor changes to improve accuracy and reduce administrative burden for APRA.
- Ensuring the test is fit‑for‑purpose when it is extended to trustee‑directed products.
“The feedback from stakeholders was primarily focused on the annual superannuation performance test, which is intended to hold trustees to account to maximise returns to members. Responding to this feedback forms the first part of the government’s response to the review.”
The YFYS review was announced in July last year, with the government electing to pause the planned extension of the performance test to “choice” or trustee-directed products for one year.
Treasury’s review determined that the test, as it stands, “may not reflect the diversity and objectives of choice products” but added that “it remains important that funds are held accountable for underperformance in the choice sector”.
“Values‑based products were a key example where the investment strategy may deviate from the benchmarks, increasing the risk of failure and constraining the trustee’s ability to meet its members’ objectives,” Treasury said.
The review also concluded that the design of the test can unintentionally affect the investment decisions of all super funds to reduce their risk of failure and closure by encouraging “short‑termism and benchmark hugging” and discouraging certain types of investments.
In response to these findings, the government argued that performance testing is imperative for the super system and that trustees must be held to account for their investment decisions.
“The performance test will be fine‑tuned with updates to the benchmarks that can be implemented within the timeframe for the 2023 testing period,” it explained.
“The lookback period will also be progressively extended from eight to 10 years which will help to reduce short‑termism and support investments that can generate strong returns for members over a longer time period.”
Further consideration will also be given to other changes that may be necessary to improve super fund performance, the government noted.
Stapling in the spotlight
Super stapling, which has been subject to criticism since coming into effect in November 2021, was also covered as part of the YFYS review.
“Stapling is increasing administrative burden on employers’ onboarding processes, particularly where an employment link is not already established,” Treasury said.
“Some employers are seeking to avoid stapling by encouraging new employees to make an active choice of superannuation fund as part of their onboarding process.”
The Labor government noted that it had raised significant concerns with how effectively stapling would be implemented when it was originally introduced by the Coalition.
“It is apparent that these implementation issues have come to fruition,” the government said.
“There are concerns with the systems, legal framework, and outcomes of stapling that are generating a significant administrative burden for employers that is leading some to bypass the stapling requirements.”
However, the government maintained that reducing the occurrence of duplicate super accounts through stapling is still in the best interests of fund members, as it reduces unnecessary fees while maximising the benefits of compounding returns.
“The government is committed to stapling and will seek to address some of the significant issues in the current system to help meet the intent of stapling,” it said.
The review also identified “inappropriate behaviour” where software providers were found to be “undermining stapling” and directing employees towards products that they are associated with.
“This behaviour should cease voluntarily. If it does not cease, then the government will explore changes to law or regulation to prevent it continuing,” the government said.
Consultation on the draft regulations will remain open until 2 May, with updates expected to be implemented prior to the next YFYS performance test in August.