Choice super funds duck scrutiny

Choice superannuation funds Australian Prudential Regulation Authority APRA
The majority of choice superannuation funds will avoid having their performance checked by regulators for another year.

Just how good is your super fund?

It is a question that is getting harder to answer, rather than easier – unless you don’t mind poring through mountains of paperwork and doing the research yourself.

The reason for the disappointing lack of information is that the much-promised performance testing of super funds has once again been kicked down the road, subject to yet another review, this time ordered by the financial services minister Stephen Jones.

That means the vast majority of choice superannuation funds will once again avoid having their performance checked by regulators for another year.

Default review led to great outcomes

Those with long memories might remember that last year the inaugural review of default fund performance found that 13 out of 80 funds – a full 16% of funds – underperformed against benchmarks.

Most of the default funds are run by not-for-profit industry funds.

This year was to be the one in which all of the choice funds, which includes a majority of for-profit super funds, finally faced the music.

This government review will have led to many collective sighs of relief from super fund managers, although once again it leaves around 6 million super consumers in the dark as to how their choice fund compares.

Would the test be unfair?

The argument put forward by many of the for-profit super managers which appears to have gained traction is that a lot more work needs to be done if the performance measurement is to be meaningful for consumers.

Some of the arguments raised by fund managers are that the benchmarks are too Australian focussed and concentrate on listed products, which might result in a fund seemingly underperforming if it is invested in unlisted or overseas assets.

Super funds that value environment, social and governance (ESG) investments might also have their performance understated by the current tests – particularly in a year in which mining and fossil fuel investments shone.

It has been estimated that up to 20% of choice funds would have failed the regulator’s testing and another 20% would be marked as below average but now that information simply won’t be available to fund members.

The Australian Prudential Regulation Authority’s (APRA) definition of underperformance was for a fund to record returns over seven years averaging more than 0.5% under their benchmark – a time frame that will be increased to eight years from now on.

Bad apples taken out of the barrel

The first test on the default funds caused some dramatic changes to the industry, with 10 of the 13 underperforming funds either closing down, leaving the industry or merging with another operator.

It would have been an interesting year to introduce fund testing because it would likely have shown some fund allocation types underperforming the benchmarks – particularly capital stable and high-growth funds, which would probably have recorded low scores due to low returns in their targeted markets.

Still, despite the limitations, the test would have been a great way to sort the sheep from the goats and to bring about some changes to get rid of some perennially poor performing funds.

In the absence of the APRA testing, the best super members can probably do is to compare the investment performance and fees charged by their fund compared to others investing in similar asset allocations.

It is not perfect, but it will at least give you some idea as to whether you are in a dud fund.

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