The classification of certain superannuation investment options as ‘trustee directed’ has continued to cause debate in the industry, fuelling calls for a review of the test.
On Friday, APRA announced the results of its 2024 superannuation performing test, reporting all 57 MySuper products passed for the first time since the test commenced, as did all 398 non-platform products.
However, looking at trustee directed products, it reported 37 out of 192 platform products failed to meet the benchmarks.
Some 27 of these products failed for a second time and will be closing to new members.
In contrast, 76 platform and 20 non-platform trustee directed products failed the test in 2023.
Margaret Cole, deputy chair at APRA, observed this year’s results demonstrate “the progress being made to address underperformance”.
She noted trustee activity to eliminate underperforming products has contributed to a sharp decrease in test failures by trustee directed products, highlighting efforts towards consolidation, restructuring or withdrawal of investment offerings.
The failed products this year were concentrated in products offered by two trustees, according to APRA. These included 36 from AMP Super trustee, N.M. Superannuation Proprietary Limited, and one from I.O.O.F. Investment Management Limited.
In a statement, AMP’s group executive for platforms, Edwina Maloney, agreed that the annual performance test is proving beneficial for most Australians by holding trustees and super funds to account for investment returns and fees.
However, AMP continues to have concerns about some aspects of the test, she said, particularly the “detrimental impact” for some customers investing through wrap platforms.
Elaborating on this, Maloney said these investment options are only tested as a result of being inaccurately classified by the government as ‘trustee directed’.
“We don’t believe these options are ‘trustee directed’, meaning the current test is delivering misleading results and causing confusion and potential financial harm for consumers,” she said.
“Consumers and their advisers have made active and informed choices to invest in these options based on individual circumstances and objectives. This is very different for most members who are invested in default MySuper superannuation funds.”
Notably, the test in its current form only assesses two per cent of Australia’s Choice platform investment market, Maloney pointed out, and excludes many of the platforms with the highest administration fees.
This makes it “impossible to use the test as the basis for properly informed investment decisions and product comparisons”, she said.
Reflecting on the failures of platform products in 2023 and 2024, Ian Fryer, general manager at research house Chant West, explained the test is based on a ‘representative member’ with a balance of $50,000.
This, he said, is “actually very unrepresentative” for platforms where the average balance sits at approximately $250,000, he told InvestorDaily.
“This balance is used for the administration fee component of the test,” he said.
“Also, since only trustee-directed diversified investment options are assessed (only 10 per cent of all diversified investment options on platforms), the median administration fee used in the test is based on only 10 per cent of all diversified platform options.
“If all diversified platform options were included in the median administration fee, the median administration fee would be much higher and we expect several of the funds that failed in 2023 would have passed, and the same is probably true for 2024.”
Fryer said it was “unsurprising” that, although there are far fewer than last time, a number of platform trustee-directed products still failed the performance test.
“In a non-platform product, a provider can simply close a failed option, which is what happened for almost all that non-platform trustee-directed options that failed in 2023. But it is much harder for a platform provider to terminate an investment option that failed the test as it will have adverse tax implications for some members,” he explained.
“So the platform providers did not have the option of simply terminating these products without considering these consequences.”
Previous Chant West analysis suggested the test’s current application only to trustee-directed products, and using a $50,000 balance, could be detrimental to consumer outcomes.
These include misleading results, consumers transferring into options with higher fees and lower performance that were not included in the test, and incurring transfer costs like capital gains tax and loss of insurance by acting on the test results.
According to Blake Briggs, chief executive of the Financial Services Council, there remain “design shortcomings” in the way the performance test applies to Choice products, where consumers with financial advice have made active choices that take into account their individual situation and objectives.
“A key concern is that the platform investment options included in the test are mis-classified as ‘trustee directed’, when the trustee has no control over the strategic asset allocation and investment decisions relating to them. These products should not be included in the test, and the consequences to consumers should be front of mind,” he said.
“The FSC encourages consumers to seek financial advice before making changes to their investment strategies following the release of performance results to ensure changes align with their individual circumstances and take into account tax implications.
“The government should improve the flexibility of superannuation funds in how they communicate failures of the performance test for trustee directed products that are captured under current rules, acknowledging that a pass or fail of a single product does not necessarily mean a consumer is not on track for their personalised investment strategy.”
Briggs continued that, with the lack of product rationalisation reforms, Australians in over 1.7 million investor accounts are “effectively trapped” in legacy superannuation products.
“These products, often closed to new members but still subject to performance testing, face tax and regulatory barriers that hinder consumers from switching to better-performing, modern alternatives,” he pointed out.
Previous research commissioned by the FSC has estimated product rationalisation reforms could result in $21 billion of additional retirement income for Australians.
ASFA back ‘room for improvement’
In a statement, the Association of Superannuation Funds of Australia (ASFA) also flagged room for improvement in the test, stating that in its current iteration, it “does not capture every aspect of fund performance.”
“While the performance test has been useful in improving fund performance, we also acknowledge that it’s a tool that considers a very limited range of indicators,” said ASFA CEO, Mary Delahunty.
“Some members may choose to pursue strategies that will likely underperform in the short-term, while anticipating long-term outperformance. This is especially relevant to ethical or green investment strategies.”
With this, ASFA called for further refinements to the test to ensure it “fully reflects the diverse strategies employed across the industry”.
However, the industry body also noted strong strides have been made with the test to ensure strong super performance from retail, industry, corporate, and public sector funds.
“The test has helped the superannuation system to realise its aim of ensuring that every Australians’ retirement savings are invested in products that outperform inflation and work to secure their retirements,” Delahunty said.
“Funds from all sectors have delivered impressive returns; several have gone well into double digits. This is testament to their professionalism and their dedication to the future financial wellbeing of their members.”
