Regulatory barriers seen eroding returns and limiting super investment

A new report has highlighted regulatory settings restricting super funds and reducing potential retirement balances for millions of Australians.

The Australian Investment Council (AIC) has urged the Government to widen its review of superannuation settings, warning that existing rules under Regulatory Guide 97 and the Your Future, Your Super (YFYS) performance test have discouraged funds from investing in start-ups and growth companies, ultimately reducing member outcomes.

New research by Mandala, commissioned by the Council, found that removing these barriers could leave young Australians up to $20,300 better off in retirement.

Private Capital: Australia’s Untapped Opportunity shows that start-ups and growth companies accessed through private equity and venture capital funds have delivered average post-fee returns of around 18.2 per cent, roughly 11 percentage points above listed assets in Australia.

Despite this, domestic superannuation funds allocate just 4.4 per cent on average to private equity and venture capital within default MySuper products.

The report further found that an additional $54 billion could be invested in these asset classes to maximise net returns and bring Australian funds into closer alignment with global pension peers, which on average allocate 10 percentage points more to start-ups and growth companies.

Mandala’s analysis also estimated that underinvestment in private equity and venture capital is costing up to 140,000 additional jobs across the Australian economy.

Moreover, the report pointed to fee disclosure rules under ASIC’s RG 97 and the design of the YFYS performance test as key contributors to the under-allocation.

Although higher exposure to private equity and venture capital would likely improve long-term member returns, the analysis revealed funds would be more likely to fail the YFYS test, which evaluates how closely returns track a benchmark rather than risk-adjusted performance.

The Council argued that transparency measures and performance benchmarks should shift toward net returns to better reflect member interests.

“We need to move the system away from a cheapest is best framework to one that delivers more money into workers’ pockets when they retire,” Australian Investment Council CEO Navleen Prasad said.

“At the same time, the potential is there to grow the pool of capital available for Australian start-ups and growth companies by $54 billion and support an additional 140,000 Australian jobs.”

“It’s rare to have such a high-impact opportunity to improve retirement outcomes at no cost to the employers, employees, or Government. Addressing the regulatory barnacles that are short-changing Australian workers should be a no-brainer.”