APRA’s heat map exposes poorly performing super funds
Choosing a good super fund is one of those really important things in life that gets put on the backburner.
However, the good news is that one of our regulators – the Australian Prudential Regulation Authority (APRA) – has done the hard work so that you don’t have to.
That is where the good news stops because APRA identifies that 44% of choice funds are producing returns that are below benchmarks.
That means around $10 billion of Australians’ retirement savings are invested in dud superannuation products that are producing “significantly poor investment returns”.
The important thing to remember is that you definitely don’t want to be in one of these funds, which means you should take a much closer look at your fund and its long-term performance – particularly if it has names on it such as Colonial First State, OnePath, BT Funds Management and Equity Trustees.
What has become apparent from APRA’s excellent heat map research is that there are some keys to looking for a good fund that are fairly easy to follow and absolutely vital if you want to have a good retirement – which is much more likely if you have a fund that achieves or exceeds basic long-term benchmarks.
Focus on fees first
The first such key bit of information is the fees charged by the fund.
High, uncompetitive fees are perhaps the greatest indicator that returns will be substandard, just because the very fact of the high fee detracts from returns.
It is no good sticking with a high fee fund hoping its returns will suddenly spring back – depressingly, such funds have a habit of limping along for many years, dragging down the cumulative returns of their hopeful members along the journey.
The best example of this is funds that have closed to new members which are much more likely to underperform and to charge high fees.
Many of these funds are closed to new members because of low demand or previous poor performance but they have an unhappy knack of continuing to milk their existing members for high fees.
Some have even suggested it is the business model of some funds.
Many of those members may only be hanging around because they are attached to the insurance cover in their fund or are just apathetic about their super but they pay a very high price for such apathy.
As well as suffering poor investment performance, the APRA analysis found average annual fees for account balances of $50,000 in closed choice products was $225, compared with $149 for open products.
It is worth remembering that MySuper default funds charge even lower fees, averaging $137 for a $50,000 account balance.
Compare long term net performance
The second most important way to choose a new super fund is to look for solid performance over the long term.
The combination of low fees and good performance tends to indicate a fund that has a sound investment system that is more likely to keep producing good results.
While we all know the old warning that past performance is not a reliable guide to future performance but that applies more to the short term, which is why looking at eight-year net investment performances like APRA does is such a powerful tool.
The latest heat map showed 20% of all the choice products that had eight-year histories were significantly underperforming the benchmarks set by the watchdog – with OnePath overseeing the most dud funds.
Other poorly performing funds included Colonial First State, the Energy Industries Superannuation Scheme, Equity Trustees and BT – all names that also appeared as “significantly poor” performers in the APRA review of default MySuper products last year.
APRA deputy chairwoman Margaret Cole said there were still “far too many products delivering substandard returns” to members and indicated that the regulator was going to get far more active with those managers who were perennial underperformers.
“APRA’s supervision of poorly performing choice products will intensify, and trustees can expect even greater scrutiny of their product offering,” she said.
“Trustees with products that are underperforming or have unjustifiably high fees – or both – will need to explain why they haven’t already moved their members to products with better performance and better fee structures.”
Get active and switch
The third key thing about choosing a super fund is to actually get active and engaged with your fund.
Among default MySuper funds there are some consequences for fund managers that consistently perform poorly – the main one being to close the fund to new members and to send information to members outlining their poor performance.
This doesn’t happen for choice funds for the very good reason that they have been “chosen” by the member – often many years previously and sometimes when working in a totally different job or industry.
If a fund you are in appears in the “dud” area of APRA’s heatmap analysis – which you can check here – it is up to you to exercise that choice by switching to a better fund as soon as you can.
Don’t wait for regulators to chide the fund managers or for some miraculous renaissance down the track – vote with your feet and get into a low fee, well performed fund with adequate insurance cover straight away.
It is not a difficult procedure once you have done the research and found a new fund that you are happy with.
The new fund should be able to handle the transfer – all you need to do is a little bit of homework, advise anybody contributing to your super of the new details and watch to make sure your new fund keeps appearing at benchmark or above in the future.