A performance test for super funds will undermine performance, detrimentally impact on innovation and erode confidence in the system


The Federal Government announcement that it will subject super funds to an annual performance test and block underperformers from taking new members is draconian, overly simplistic and if implemented, will have potentially significant and negative impacts on investment outcomes for members, according to Matthew Griffith, Principal Consultant at JANA, Australia’s largest investment consultancy.

Matthew believes the move will reduce industry innovation, promote “index relative” mediocrity and reduce appetite for Trustee’s to “be different”. This includes previously successful approaches such as investments in nation building infrastructure and property, and supporting entrepreneurs who access capital through superannuation investments via public markets, private equity and debt.

He states that the Government approach is heavy-handed, interventionist and ignores that natural market forces and regulatory changes over the last 20 years have resulted in heightened competition, consolidation and pressure to maintain strong member outcomes – particularly since Stronger Super was introduced in 2013.

Whilst there are some positives in the Government’s superannuation budget announcements, the Government’s annual performance fee test is overly simplistic and undermines the evolution of recently developed regulatory initiatives which take a more holistic view of performance assessment: “The ink is barely dry on recent regulatory innovations that are focused on member outcomes, creating heightened uncertainty with respect to retirement policy stability for members and the industry.  Further, this proposed change will potentially drive the market towards an oligopoly structure made up of ‘index huggers’ and mean more mediocre results for members.”

There isn’t a problem here to fix

Whilst there is always room for improvement, I’d argue our system has, by global standards and in aggregate, produced strong long term net returns, provides access to a wide range of financial services, and provides members a reasonable retirement income. This is not a crisis.

This is not just JANA’s view, but is also a view shared by many other global researchers, consultants and practitioners who consider Australia’s retirement system to be amongst the best in the world in terms of long-term net investment outcomes, population coverage and projected retirement outcomes.

There are always improvements to be made, and JANA supports the budget’s other superannuation measures, including ensuring super accounts follow workers when they change jobs. However, there was already in place a range of tests and measures aimed at protecting members, and the performance test is overly simplistic with harsh consequences for failure.

The problems with the annual performance test

The new regime assesses Funds on only one criteria. In reality, the best Fund for any member is a combination of risk alignment, performance objectives, investment approach, appropriate insurance, and service levels including advice.

Index relative approaches (which is what the government appears focused on) in our experience inevitably results in only one thing: index relatively mediocrity. This is not in members’ best interests.

We all want a high-performing industry, but the ink has barely dried on recent regulatory innovation, and this includes a wider range of measures more appropriate for a holistic measure of fund performance (given funds are a bundle of products and services, not just investments). We’d prefer more focus on enhancing and developing existing regulatory approaches.

We’re all for continued evolution of the system for better member outcomes, but continued tinkering with the rules undermines confidence in the system and provides significant challenges for mum and dad retirees attempting to plan for their retirement over long horizons.

And the potential implications are:

  • We fear that the drive to be within 0.50% of an index benchmark will result in an “averageness” mindset that might blunt enthusiasm for adopting points of difference which may be truly beneficial to members over the longer term.
  • More extreme progression towards industry consolidation.

By Matthew Griffith, Principal Consultant

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