Ian Fryer
Despite some helpful tweaks to the proposed format of the Your Future Your Super performance test to make it fairer and reduce some unintended consequences, more changes are needed, says Chant West general manager, Ian Fryer.
He says the changes continue to measure the implementation of an investment strategy, rather than metrics that are related to member outcomes, which is what super should be all about.
“In its current form, the performance test will still drive many funds to focus on passing the test rather than targeting strong risk-adjusted returns for their members, which is what they need to do as super funds and trustees.”
He also flagged that shortly, the performance test results will be extended to trustee-directed options in choice products, with the test results released in August.
“There are a number of issues with this approach, but perhaps the biggest issue is to do with the treatment of fees in choice products, especially platform products.
“The balance used for the administration fee component of the performance test is $50,000 for all types of products. While this may work for industry funds and master trusts, it makes no sense for platform products where the average balance is over $250,000 – indeed these products were not built for members with balances of $50,000.
“Some of these products have high dollar-based fees and low percentage-based fees. These work well for members with $250,000 or more, but look expensive for balances of $50,000.
“This will put some wrap products between 50 basis points and 150 basis points behind the test metric just on administration fees. But if a $250,000 balance was used they would be only slightly behind the benchmark fee – this would be fairer.
“There are also issues with platform product fees being only available gross of tax, as tax is calculated at the level of each individual member, whereas APRA’s fee data for other products are after tax.”
He adds there are issues for responsible investment (RI) options that need to be addressed.
“RI investment options will be measured against broad market indices, which is wholly inappropriate and will likely lead to many of these options failing the test at some point in the cycle, just because the broad market has done better than a portfolio that takes into account long-term prospects of companies – which is what RI portfolios try to do.
“In addition, members choose to be in an RI option, and it is possible that some of these options may fail the test twice so members won’t actually be able to choose such an option in the future,” Mr Fryer says.
Zenith Investment Partners’ head of responsible investing, Dugald Higgins, says issues with RI are not only limited to Your Future Your Super.
“The greenwashing crackdown is still ramping up, with ASIC releasing another activity report on 10 May 2023, along with a strong warning to the industry at the recent RIAA conference.
“But the fact is that eliminating greenwashing entirely is unlikely and market participants need to be aware of the risks of relying on regulatory guide rails alone.
“While it’s vital for managers to be able to measure and demonstrate the role of RI in their investment strategies, we believe it’s equally important that investors can accurately identify which strategies meet with their needs and align with their investment beliefs.
“The political weaponisation of ESG, which we have already seen in the US, is now starting here, and the market needs to understand how to navigate its way to better outcomes than those being achieved in the US and elsewhere.”
Higgins believes that the confluence of these issues will bring challenges.
“This is going to be a tough time to be a company director, investment manager or super trustee,” he says.
“Businesses are caught in the bear trap between regulations and regulators. On one hand, customers, capital providers and now governments will demand businesses state their stance on sustainability. On the other hand, regulators stand poised to crack down on those not being transparent on claims. You need to walk a fine line.
“For all the support we see on embracing a globally consistent disclosure regime, we suspect many businesses haven’t considered the reach and implications of new regulations and the complexity, effort and cost to deliver. You are going to have to quickly work out what resources to create or who you need to partner with to deliver on these issues,” Mr Higgins concludes.