What to do if you find yourself in a dud super fund

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The Australian Prudential Regulation Authority (APRA) conducted its first performance test for MySuper funds last year and created a stir when it failed 13 of the 80 products tested.

Under the federal government's Your Future, Your Super reforms, which came into effect last July, those funds had to write to members to notify them of the failure and provide details of the Tax Office's super fund comparison tool if they wanted to switch.

The failed funds represented 1 million members with accounts worth a combined $56 billion. They were a mix of industry-type not-for-profit funds and some commercial funds run by banks and other fund management organisations. Already it appears some members have taken the letter as a sign to leave for greener pastures.

what to do if you find yourself in a bad super fund

But the APRA test has also attracted criticism for being too blunt. In a research paper in November, consulting firm Chant West argued the test focused on how the funds performed against a benchmark portfolio without asking whether their investment strategy was appropriate for members.

"The consequence is that funds can deliver great outcomes for their members but still fail the test," it said. "Meanwhile, other funds may deliver inferior outcomes for their members ... but still pass."

How it works

APRA used the asset allocation of each fund to create a "benchmark" portfolio that invested in the same asset classes. The performance of the benchmark was determined by using broad market indices for each type of asset.

Funds were compared against this benchmark over the past seven years (it will be eight years from now on) with adjustments for tax and the administration fees charged in the past year.

To pass the test, funds had to be within half a percentage point of the benchmark return. Funds with less than five years of performance returns were assumed to have passed.

While the level of underperformance wasn't originally released, APRA planned to include this information in its super fund heat map published at the end of the year.

The regulator has said it will require funds that failed to report on the causes of their underperformance to advise what they're doing to address it.

These funds will also have to have contingency plans, including moving members to another fund if need be. Funds that fail a second year will no longer be able to accept new members.

What is a bad fund?

If your fund has failed the APRA test, it's certainly worth doing some research to find out why and whether you'd be better off switching. But the test only applies to MySuper products (which can receive default super contributions).

Many members are in funds that don't have a MySuper label and could also be chronic underperformers.

Ideally, investors should review their super fund each year when the annual report comes in to check that it's managing your money as you want it to. But if you haven't got around to that lately (hello Covid, lockdowns and so on), the start of the year is as good a time as any.

The Tax Office's YourSuper comparison tool is a great place to start as you can select up to four MySuper funds and see how your fund measures up. APRA's heatmaps are also useful with data for all MySuper funds on performance, fees and the fund's ability to sustain member outcomes.

Research companies like Chant West and SuperRatings provide a mine of information on major funds with performance rankings, fee information and ratings.

However, the standard precaution is not to compare funds on their short-term returns. While it might be gratifying to know a fund was the top performer over the past year, super is a long-term investment, and you want a fund that produces steady returns over time. The APRA heat map uses a five-year performance measure to rate funds, but many have been going much longer so you can see how they have fared through several market cycles.

As Chant West points out, it's also important to consider your fund's performance in light of its stated investment objectives. It is not uncommon, for example, for funds to target a return related to the inflation rate, such as inflation plus 3%, rather than focusing on market benchmarks.

Raw performance numbers also fail to show how much risk a fund is prepared to achieve its returns, so if you're considering moving, it makes sense to check out your potential new fund's investment strategy and how it manages risk.

The research paper said funds that put in protection strategies to reduce the risk of members losing money in a market correction might also have fared poorly under the test, simply due to bad timing. These funds, particularly if they had older members, could have been doing the right thing for their members, but Chant West says this is not factored into the results.

So it is critical to ask whether your fund's investment objectives suit you, and whether it is meeting those objectives. Fees and insurance coverage also need to be considered to work out whether your fund measures up.

Did you know?

Despite all the scares and volatility, the past seven years have been great for sharemarkets and super funds with exposure to growth assets. While 2021 figures were not available within Money's print deadlines, the top balanced funds were up by more than 20% in the year to the end of October, and 10-year returns were around 8%-10%.

Best-case scenario

Any measure that shines a light on super fund underperformance and alerts members to the fact they could be getting a better deal elsewhere is welcome, even if it only prods members into looking more closely at their fund and whether it is acting in their best interest.

Worst-case scenario

Chant West says the APRA test is already influencing how funds are managed, with funds chasing short-term benchmarks rather than focusing on what is the right strategy for members over the long term. It argues it also makes it harder for underperforming funds to "right the ship" as members are encouraged to leave.

The wild card

Investment markets have always been and always will be volatile despite a good run in recent years. Funds and their members need to be prepared for that.

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Vita Palestrant was the editor of the Money section of The Sydney Morning Herald and The Age. She has worked on major metropolitan newspapers here and overseas and has won several prestigious journalism awards including the 2001 Citigroup Award for Excellence in Journalism, Personal Finance Category.

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