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Industry voices concerns as government moves to revamp YFYS test

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The federal government is seeking to improve the test to ensure it doesn’t discourage investment in “economic priorities”.

The federal government will soon consult on options to reform the annual Your Future, Your Super (YFYS) performance test, Treasurer Jim Chalmers has announced.

Mr Chalmers explained that the government’s goal is to ensure superannuation trustees are held to account for member outcomes without stifling investment in “economic priorities” such as the net zero transition and housing.

According to the Treasurer, there are concerns that the test is influencing investment decisions to the detriment of members, including discouraging investment in asset classes that can strengthen the economy.

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“The test has helped lift the investment performance of superannuation funds by encouraging continual improvement or exit of underperforming funds,” Dr Chalmers said.

“A consultation paper canvassing options to address these issues will be released soon.”

The move was officially announced following the third Treasurer’s Investor Roundtable in Canberra on Tuesday, attended by representatives from super funds as well as major banks, venture capital firms, and asset managers.

Among those in attendance was Rest chief executive officer Vicki Doyle, who argued that the performance test methodology requires further improvement to ensure it is supporting the best possible outcomes for fund members.

“The current methodology could also be better aligned with the industry’s appetite to invest in opportunities that support the energy transition and deliver strong long-term returns to our members,” she said.

“We look forward to consulting with government and our industry peers on ways to ensure strong performance standards in the superannuation system that enhance the financial interests of our members.”

The performance test was previously found to have had a constraining impact on the ESG, sustainability, and carbon transition activities of super funds.

A review by Treasury earlier this year also concluded that the performance test encourages “short‑termism and benchmark hugging” and discourages certain types of investments.

Following Treasury’s review, the government pledged to increase the testing period from eight to 10 years and calibrate key benchmarks to ensure that funds are not unintentionally discouraged from investing in certain assets.

In a statement on Wednesday, the chief executive officer of the Financial Services Council (FSC), Blake Briggs, said there should be a “high bar” for further changes to the performance test.

“Regular changes come at a cost for consumers as trustees re-evaluate and adjust their investment strategies relative to the new benchmarks,” he said.

Mr Briggs said that the performance testing of super products has been successful, with 17 MySuper products exiting the market by merging their peers as a result of the test.

This, he said, has resulted in the transfer of $75.5 billion in retirement savings to higher-performing products across 1.4 million member accounts since the first test in 2021.

“The case for material consumer benefits, in addition to the broader economic benefits to Australia, should be clear before further changes are implemented to offset the inherent transition costs of further tinkering,” Mr Briggs continued.

“The consultation also will provide a further opportunity to address known methodological issues and regulatory barriers to product modernisation when performance testing trustee-directed products, which commenced this year.”

In August, the Australian Prudential Regulation Authority (APRA) reported that 96 trustee-directed products (TDPs) failed to meet the benchmarks of its 2023 performance test.

Test ‘not fit for purpose’: AMP

A total of 75 per cent of TDPs that failed to meet the test benchmarks in 2023 were concentrated among four trustees: AMP’s N M Superannuation Proprietary Limited, Nulis Nominees (Australia), Oasis Fund Management, and OnePath Custodians.

In its response to the government’s planned consultation, AMP said it supports the intent of the performance test but argued that it is “not fit for purpose”.

Edwina Maloney, group executive, platforms at AMP, pointed out that not all investment options are included in the performance test as it stands.

“The current test only includes trustee-directed products – a very small subset of funds that are recommended by a financial adviser – and does not apply to the plethora of diversified investment options that are available on platforms (known as ‘externally directed products’),” she said.

“With fewer super funds offering TDPs on platforms in the test for 2024, we can expect the test will continue to focus on a small subset of the platform market until this is changed and therefore not be a level playing field across investment options.”

Ms Maloney said the methodology of the test deserves closer scrutiny. Additionally, she suggested that a “fair test” means ensuring that all platforms are tested.

“AMP continues to urge the government to reconsider the test methodology for wraps, to improve transparency and, in particular, address the immediate issue of providing capital gains tax relief for members having to exit products which haven’t met their [annual performance test] benchmark,” Ms Maloney concluded.

Major super funds react

In a statement provided to InvestorDaily, HESTA CEO Debby Blakey said that the fund has raised concerns that the methodology of the performance test doesn’t appropriately identify persistent underperformance or measure the value delivered to members.

“Further, we believe the current test risks driving unintended consequences in investment decisions, reducing net returns and stifling investment innovation to meet emerging capital needs and opportunities,” she said.

“In particular, it’s important we get the policy settings right for more investment in climate solutions, which can support us to continue delivering strong long-term investment returns for members. We believe the current performance test, particularly some of its benchmarks, is a barrier to more super fund investment in this area.

“We welcome the opportunity to participate in the federal government’s consultation on changes that will better achieve the aims of performance benchmarking and help lead to better retirement outcomes for our members and for all Australians.”

Meanwhile, a Hostplus spokesperson said that the fund welcomes the government’s “ongoing efforts to ensure that members can objectively and accurately compare funds, on a like-for-like basis” through the review of the YFYS measures.

“We were pleased to see the addition of Choice products to the YFYS performance test earlier this year and value the opportunity to continue to work with the government as it considers further adjustments,” the spokesperson said.

“Hostplus remains committed to providing feedback to government on areas for improvement to ensure that the measure remains closely aligned with its intent.”

Industry voices concerns as government moves to revamp YFYS test

The federal government is seeking to improve the test to ensure it doesn’t discourage investment in “economic priorities”.

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Jon Bragg

Jon Bragg

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.

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