13 super funds fail inaugural performance test

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Big names like Colonial First State's FirstChoice, BT Super and Christian Super are among the 13 superannuation funds that failed APRA's inaugural performance test.

In all, APRA tested 76 MySuper products in this round, of which 13 failed. This represents a pass rate of 84%.

The full list of failing funds is: AMG MySuper, ASGARD Employee MySuper, Australian Catholic Superannuation and Retirement Fund's LifeTime One, AvSuper Growth, BOC MySuper, Christian Super's My Ethical Super, Colonial First State's FirstChoice, Commonwealth Bank Group Super's Accumulate Plus Balanced, EISS Balanced, LUCRF Super's MySuper, Maritime Super's MySuper, BT Super MySuper and lastly, the Victorian Independent Schools Superannuation Fund's MySuper product.

dud super funds slammed for underperforming super consumers australia

Some failing funds have already moved to improve member outcomes.

Four funds have already announced firm or planned mergers with passing funds, while CFS FirstChoice yesterday announced a fee cut.

BOC is merging with Equipsuper, EISS is exploring a merger with TWU, LUCRF is merging with AustralianSuper and VISSF is merging with Aware Super. All of these merger partners passed today's test. Additionally, Maritime has pooled its investment assets with Hostplus.

Meanwhile, ACSRF which failed the test was due to merge with NGS (which passed), but both funds scrapped the plans last week.

"Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year's test or start planning to transfer their members to a fund that can deliver better outcomes for them," APRA executive board member Margaret Cole said.

There are 80 MySuper products but four were not tested, as they did not have five years or more of returns.

The YFYS performance test

The new annual performance test has two components: average investment returns (net of investment costs and taxes) for the last eight financial years versus a benchmark, and the administration fees for the last financial year versus a benchmark.

If on adding the two numbers, the fund slips below 0.5%, it will have failed the test.

The investment benchmark is constructed according to a product's strategic asset allocation from the APRA-prescribed broad-based benchmarks. For administration fees, the benchmark is median administration fees for a group of similar products (such as all MySuper products).

Funds that failed the test today have 28 days to notify their members of the result. This must be done in a strict format as laid down by Schedule 2A of the YFYS bill.

Today's results included MySuper products only. They will face the music again on July 1, 2022.

The new performance testing regime was floated at the annual budget in October 2020 and came into effect on July 1 this year. Final amendments, that included a more forgiving treatment of administration fees in test results, were made earlier this month.

APRA notified failing funds yesterday, before publishing the results more widely today.

ASFA responds, advises consumer caution

Association of Superannuation Funds of Australia (ASFA) chief executive Martin Fahy said while the orderly removal of underperforming superannuation products is a good thing, the test results are potentially confusing for members.

As the test's flaws, Fahy counted its retrospective and relative nature, the variation in pass/fail outcomes among super funds that have the same return over the same period and APRA's lack of transparency on the quantum by which a fund passed or failed.

"We have long said that habitually underperforming funds should undertake an orderly exit and consumers should be protected during that process," Fahy said.

"But this test doesn't do that. Instead, it sets an arbitrary bright line and removes from the process any role for judgement by our regulators."

ASFA said superannuation members should consider what their fund has delivered over longer-term horizons of five years and more, not just the test results.

"Among these so-called 'underperformers' we have products which have doubled people's investments over the past decade," Fahy said.

"The irony is that the financial performance of these products would be in the top quartile in many OECD countries."

Good performers failed: Rainmaker

Rainmaker Information said many MySuper products that failed the test today have market-leading returns, at least median returns, or have beaten funds that passed the test.

"For example, BT Super MySuper is right now, in Rainmaker's assessment, the third-best performing lifecycle product in the market measured over one, three and five years. Indeed over five years, returns across most of its age cohorts are significantly higher than returns achieved by many single strategy MySuper products that did pass the test," it said.

According to Rainmaker, Christian Super is one of the least volatile MySuper products in the market and, compared to other ESG products, its MySuper is in the best 10 for top risk-adjusted returns.

"Australian Catholic Super's test result is similarly surprising given that three years ago it restructured its MySuper product to become a lifecycle. Its balanced option, which forms a major element of how it implements its lifecycle strategy, ranks top 10 over three years, and this is even before we consider how Australia Catholic Super is one of Australia's most consistently strong funds when measured on a risk-adjusted basis," it said.

This article first appeared on Financial Standard

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Kanika Sood is the funds management reporter at Financial Standard. Before this, she was a graduate reporter at Bloomberg's Sydney newsroom, primarily covering equities. She has a Master's degree in journalism from Monash.