Tax change needed to prevent members stuck in underperforming funds: FSC

12 October 2023
| By Laura Dew |
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Financial Services Council chief executive, Blake Briggs, is keen for the industry to make headway on the heat map and performance testing process for super funds.

In a podcast with Netwealth CEO, Matt Heine, Briggs discussed areas the organisation is focusing on going forward in the superannuation space.

One of these is the APRA performance test under Your Future, Your Super that was recently expanded to certain trustee-directed products.

“An area that we really want to make headway on is the heat map and performance testing process for super investment products. It’s an area of frustration, to be honest, because the government has done a very good job of identifying and naming and shaming products that are underperforming,” Briggs said.

“But what is not openly talked about is the fact that the vast majority of these products are closed to new investors and the reasons why existing members are usually in them is for tax reasons, they can’t roll out simply without getting a tax event.”

MySuper funds benefit from CGT relief on rollovers that has meant those funds that have failed the performance test have been able to merge with another fund, but this is not the case on trustee-directed products.

“The same thing should be there for choice products as well and that should be a priority for the government,” Briggs said.

“When they see the next suite of failures when performance testing is done at the back end of this year and they see consumers getting upset because they have received a letter from the government saying their product has failed, advisers will get phone calls from their client saying, ‘Why did you put me in a product that failed?’

“The government has designed a process where the failure of investment products will be communicated directly to the consumer and conveyed in very blunt language and the adviser is usually cut out of that process. They will not receive a copy of the letter the government is sending and the first they may be aware of it is when they get an upset client.”

Previously, Financial Advice Association of Australia general manager for transformation and policy and advocacy, Phil Anderson, warned financial advisers were likely to see increased workloads following the performance test results as the test was expanded to more products.

“The performance testing regime has merit, and notifying clients when they are in a poorly performing product is appropriate. There are, however, potential implications for clients, including generating anxiety and doubt about their current super and advice arrangements,” he said in August.

“Whilst the government prescribed message, issued by the trustee, will be to consider moving to another fund or investment option, it is essential that clients get advice and carefully consider the merits of moving or making changes. Switching funds has significant implications, including with respect to insurance arrangements.”

Briggs concluded that there is a whole suite of low cost investment options available and it is in the industry’s interests to move members from legacy funds to newer ones that are passing the performance test.

“We’re trying to have a conversation with APRA and the government around better disclosing why there’s a lot of red on some of these products in the heat maps, but also creating a vehicle to be able to help the industry close them down and move to contemporary products,” Briggs said.

“That’s an area we want to make headway over the next six to 12 months.”

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