Further work needed on draft Your Future, Your Super regulations
Elayne Grace
The Actuaries Institute has welcomed the federal Government’s draft Your Future, Your Super reforms, but warns there are fundamental problems with some of the key proposed regulations, including the test that deals with superannuation funds that ‘underperform’.
The federal Government recently issued the draft regulations to support the Your Future, Your Super Bill (that is currently before Parliament) on 28 April 2021. The Your Future, Your Super reforms were announced in last year’s Budget. The aim of the comprehensive package is to deliver better outcomes for Australians as they save for their retirement through mandated superannuation. The proposed reforms aim to address fund underperformance, accountability, and multiple accounts.
Actuaries Institute Chief Executive, Elayne Grace, said the Institute supports the intent of the regulations and the opportunity to comment on the draft reforms. “Our members have had significant involvement in the development and management of superannuation in Australia,” Ms Grace said. “This includes regulation, financial reporting, insurance in super and risk management.”
In its submission to Treasury, lodged on 25 May 2021, the Institute said it believes the proposed performance test is not sound for its intended purpose. “The test may, in some cases, be to the substantial long-term detriment of members,” the submission states. The convenor of the Actuaries Institute’s Superannuation Practice Committee, Tim Jenkins, said the performance test fails a ‘pub test’.
“Asset allocation is the largest driver of total net returns, yet is disregarded by the test,” Mr Jenkins said. “The proposed test narrowly focuses on how a trustee has implemented an investment option’s disclosed asset allocation, not on member outcomes. “As a result, the proposed performance test leads to some concerning results, including an investment option with top quartile net returns potentially failing the test. Or two investment options having the same overall risk profile and identical net returns after fees yet one passes the test, and the other fails.”
The difference in net returns between investment options with the same risk profile and same test result can exceed 1% p.a., which is a substantial difference to eventual member outcomes.
“Trustees will need to manage the risk of failing the test, potentially leading to worse member outcomes,” Mr Jenkins said. “The test may also lead to large outflows in the short term, causing liquidity issues and lowering returns for members of affected funds. There are also insurance implications for super fund members that the proposed reforms do not recognise.”
In its submission, the Institute:
- recommends the introduction of the performance test be deferred;
- if there is no deferral, it recommends that transitional arrangements should apply to protect member outcomes; and
- highlights there must be greater focus on the value of insurance in super in order to protect members.
The performance test also relies on the accuracy of information reported to APRA.
APRA has said it needs to significantly enhance the comparability and consistency of reported data,” Mr Jenkins said. “While the quality of data is improving, there remain questions over the reliability of historically reported data, particularly for older periods, for administration fees and strategic asset allocation.
“There are major implications for the integrity of the test until these historic data issues are addressed.
“The ramifications of failing the performance test need to be proportional to its reliability and impact on member outcomes. There are significant consequences for a product and its members which fails the test, including sudden large outflows that create liquidity issues and adverse member outcomes, particularly to the disadvantage of remaining members.”
The Actuaries Institute is also concerned that the basic nature of the Your Super comparison tool in the draft Regulations will potentially lead to inappropriate consumer choices.
Coupled with the Your Future, Your Super stapling proposals, the reforms may mean members inadvertently lose valuable insurance in superannuation benefits. This is of particular concern for members entering dangerous occupations.
