FAAA voices reservations on extending performance test to retirement products

24 April 2024
| By Keith Ford |
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In a submission to Treasury, the Financial Advice Association Australia has flagged “reservations” about extending performance testing to retirement phase products beyond superannuation.

According to the industry body, this is particularly the case with annuity-type products “that cannot be readily compared” and are “significantly impacted by interest rates at the time of commencement”. 

“Equally as the paper recognises, they cannot be changed easily without serious consequences,” it said.

“The establishment of some form of comparator tool is certainly worthy of further consideration. There are other important differences with account-based pensions. We would suggest that more thought might need to go into this before further extending the performance testing to retirement phase products.”

However, the FAAA said it still supports a performance testing regime “in principle”.

“We expect our members to carefully consider performance and to actively give thought to moving clients where performance is poor,” the submission said.

“We are also conscious that this needs to be done carefully as there may be reasons for clients to remain in underperforming products, such as tax reasons, the cost to move and proximity to retirement.”

Last month, the government launched a consultation to look into design options for the annual superannuation performance test, observing there is evidence that “the test may be influencing investment decisions to the detriment of member outcomes, including discouraging investment in asset classes that may otherwise be in the best financial interests of members”.

Treasurer Jim Chalmers said the consultation was aimed at ensuring super funds are able to invest in ways that deliver the best possible returns for members and is not the government “directing super investment”.

“The performance test holds trustees to account for the investment performance they deliver and the fees they charge. Since its introduction, it has helped lift the investment performance of super funds by encouraging continual improvement and the exit of underperforming funds,” he said at the time.

As outlined in its submission, chief among the FAAA’s concerns is how heavily a product’s past performance may impact its rating despite improved near-term performance.

“While longer-term performance testing results for some funds/options, consistent with the eight to 10-year time frame that has been tested so far, may have been poor, the fund or options’ more recent performance might have been strong,” it said.

“From an adviser’s perspective, recent performance is very important and poor performance that is over five years ago, yet still captured in the testing regime, is less relevant. Advisers are unlikely to recommend a client move away from a fund with strong three-year performance, because the eight to 10-year performance is poor.

“The longer-term performance time frame does tend to penalise funds for the long term, making it very difficult to recover.”

Similarly, if fees have been brought down as a result of performance testing, this should be recognised in subsequent tests.

“The thing that matters is what the fees will be next year, not what they were five, eight or 10 years ago,” the submission said.

“We favour a multi-metric approach and particularly one that includes a hierarchical design. While making it a multi-layered model will add complexity, this will also help to address situations like those that we have raised above, where long-term performance may be below average, however recent performance is strong.”

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