Spender pushes for review into YFYS, RG 97 to address ‘suboptimal outcomes’

The Your Future, Your Super scheme and RG 97 may be directing capital away from more productive uses and discouraging active investment strategies, says the independent MP.

Independent member for Wentworth Allegra Spender has urged the Productivity Commission to consider amendments to the Your Future Your Super (YFYS) scheme, RG 97 and the liquidity requirements for superannuation funds in response to its Five Pillars Productivity inquiry.

In her submission, Spender stressed that Australia must encourage greater investment in early-stage capital in order to meaningfully boost productivity.

Her submission raised concerns that the YFYS scheme may have encouraged more passive investment strategies and discouraged private capital investments that attract higher fees.

Spender acknowledged that the increased transparency and restrictions on underperforming funds introduced under YFYS had a positive impact in relation to fees.

However, she warned that the ongoing impacts of changes under YFYS could be having a “suboptimal outcome in terms of the allocation of capital and net returns for consumers”.

She noted that a Treasury review of the YFYS scheme in 2022 had found that the performance test likely had impacts on investment decisions, “encouraging short-termism and benchmark hugging”.

The submission also warned that RG 97, issued by ASIC in 2019, had likely driven investment away from private capital.

“Industry stakeholders have expressed to me that the focus on gross fees in product disclosure statements as a result of RG 97 has encouraged more passive investment strategies and discouraged private capital investments that attract higher fees,” Spender said.

“I recognise the merits of both schemes, however, also acknowledge the likelihood that these incentives are directing capital away from more productive, yet riskier uses,” she said.

“Not only that but discouraging more active investment strategies is likely lowering the potential returns on super balances for members.”

Spender has encouraged the Productivity Commission to consider options for amending the two schemes to address any disincentives without removing consumer protections.

“This could include greater focus on net fees and longer investment horizons for performance testing,” she said.

The submission also urged the Productivity Commission to investigate whether risk appetite and liquidity requirements enforced upon banks and superannuation was leading to “a suboptimal allocation of Australia’s investment pool”.

Spender noted that stakeholders she had consulted had suggested that liquidity requirements for superannuation funds had prevented long-term investment strategies for what is “fundamentally a long-term investment”.

Comparisons to international pension funds indicates that Australia’s superannuation sector holds a considerably different share of assets compared to other pension schemes, focused more on shorter term asset classes including cash and equities.

A Global Pension Assets Study released in February this year by the Thinking Ahead Institute found that Australian super funds, on average, held roughly 52 per cent in equity and 10 per cent in cash.

The 10 per cent allocation to cash was substantially higher than the cash allocations made by foreign pension funds, including Canada, Japan, the Netherlands, Switzerland, the UK and the US, according to the study.

Spender acknowledged that other industry experts had attributed Australia’s unusually high short-term assets, in particular cash, to the large and frequent contributions made to the system, rather than to risk aversion.

“Nonetheless, I would encourage the Productivity Commission to consider whether risk appetite and liquidity requirements enforced upon banks and superannuation is leading to a suboptimal allocation of Australia’s investment pool,” she said.

The submission also outlined the importance of Australia creating new and innovative firms for meaningfully boosting productivity, with younger firms often contributing more to Australia’s productivity.

“Research by e61 shows that it is younger firms that are typically more productive and recent RBA data even shows that small-to-medium businesses have overtaken large business as the primary contributors to R&D expenditure,” the submission said.

While private capital in Australia, including venture capital, has grown significantly in the past decade, Australia still has proportionally low rates of investment capital in early-stage investment.

“Analysis conducted by the Tech Council of Australia shows that, on a per capita basis, Australia has roughly half the rate of the United Kingdom and one-third of the United States,” Spender said.

“Strong competition for capital is important to ensure the best ideas are backed. However, in various roundtables that I have held with start-ups and VCs in Wentworth, access to capital is repeatedly mentioned as the biggest hurdle and one of the main drivers for some of our best and brightest heading offshore.”

The submission outlined that sources of capital for firms are generally limited to banks, institutional investors and individual investors, both foreign and international.

“In Australia, bank lending to small and medium business is limited, with most of the bank lending going to large businesses that is typically secured,” it said.

Spender said this leaves institutional investment as one of the key areas for young firms to access capital, which is also becoming more challenging to secure.

A report by the RBA into the private equity market in Australia last year outlined that the Australian superannuation industry had gone from being the dominant investor class in Australian private equity to accounting for one-third of capital committed.

The report noted that superannuation funds had reduced their exposure to unlisted equity over recent years from around 12 per cent of total assets in 2013 to 5 per cent in 2023.

“In conversations and roundtables, [these] areas are repeatedly discussed as potentially holding this sector back,” Spender said.