Industry Super Australia (ISA) and the Financial Services Council (FSC) have come out in favour of the improvements to the Your Future, Your Super (YFYS) performance test after further changes were announced last week but flagged some pending concerns.
Earlier this year, the government announced the findings from a stakeholder consultation on YFYS and launched a second consultation on the proposed changes which it said would be explored before the August 2023 performance test.
Among the confirmed changes were: an increase in the minimum testing period for all products from five to seven years to align with the increase in the lookback period from eight to 10 years; and testing the representative administration fees and expenses (RAFE) for platform trustee-directed products (TDPs) against the median RAFE of other platform TDPs to compare a similar level of service.
There were also benchmark changes with international credit changed to Bloomberg Global Aggregate Corporate Index (hedged AUD) and Australian and International Listed Infrastructure changed to FTSE Developed Core Infrastructure 50/50 100% Hedged to AUD Net Tax (Super) index.
“In a positive move the government has increased the testing assessment timeframes from eight years to ten, which better reflects the long-term nature of super fund investments. But concerningly Choice products will almost certainly have a higher administration fee benchmark than MySuper funds and products sold via a retail platform will likely have an even higher fee benchmark still,” said Industry Super Australia (ISA).
The latest heatmaps had shown one in five Choice options significantly underperformed their benchmark and had far higher fees than the MySuper product average.
However, ISA noted that applying one benchmark across the sector would more effectively bring fees down, and welcomed the government’s call to explore further changes.
The industry body further advocated for changes like:
- Testing of all APRA-regulated products;
- Only stapling members to products that have passed the performance test
- Changing the Australian Tax Office’s YourSuper comparison tool to sort funds by net returns to members as the default sorting option of fees placed some poorer performing products near the top of the list.
“We are concerned that workers are only going to get the full benefit of lower fees and better performance if the same benchmarks are applied across the board,” said Bernie Dean, ISA chief executive.
“Members in funds that haven’t been tested or have a higher fee benchmark might be in the dark about its performance, which can lead to them being ripped off by a dud fund.”
Dean warned against disengaged members languishing in a dud super fund in what was a compulsory superannuation system in Australia.
“The government needs to upgrade consumer protections, so members are only stapled to the best funds, who have passed the performance tests,” Dean said.
Meanwhile, the FSC noted the government had made improvements to the proposed regime through consultation, specifically splitting the test and the calculation of the benchmark into separate categories of superannuation product, and switching to test platforms on a gross of tax basis.
However, it believed the government’s “pursuit of rough justice for underperforming investment options” risked consumers becoming collateral damage, and said issues with the chosen methodology would result in consumers receiving notifications from the government that their investment option had failed, when this was incorrect.
“Consumers are urged to speak to their financial adviser if they receive a notification later this year before making investment decisions that may not be in their best financial or tax interests,” said FSC CEO, Blake Briggs.
“The potential for adverse consumer outcomes is recognised through the government amending the official notification to consumers to flag the risk of cost considerations.
“The objective of these reforms is to raise investment returns for consumers and the parliament should reconsider the risks of the proposed methodology to prevent the test failing superannuation consumers.”
The FSC urged the government to also address the existing shortcomings in the superannuation product modernisation regime by providing CGT rollover relief for superannuation trustees.
“A product modernisation regime for superannuation products will expedite the closure of underperforming investment options by removing tax consequences for consumers,” Briggs added.
