True to label

The recent introduction of choice of fund legislation has seen an exponential growth in the number of surveys and comparisons of superannuation fund performance.

While members of funds need to be made aware of their fund’s performance, as well as the fees being charged, there is a concern that too much emphasis is being placed on these performance comparisons, and that the industry is falling into the trap of not comparing like with like.

Research carried out by Mercer shows that there is a huge range of underlying asset allocations applied to investment options described as balanced or diversified, which in turn will result in a wide spread in the investment returns. At the same time, the return obviously does not necessarily mean that one option has performed better than another relative to what could be expected.

Reviewing a range of public offer master trusts and industry funds has shown that the balanced option can range from a benchmark low of 50 per cent in growth assets (shares and property) up to 85 per cent in growth assets. Each of these options has called itself balanced, and in turn these balanced options have been included in surveys made available to the broader community, supposedly on the basis of giving members the ability of comparing one fund’s balanced option performance against another.

Not surprisingly to readers of Super Review, in years of strong equity returns, the balanced option with 85 per cent exposure to growth assets will outperform the option with only 50 per cent exposure to growth assets. However, it is not reasonable to assume that the fund with the higher growth exposure is necessarily a superior performing option, nor that members in the low growth option should leave it and move to the high growth option.

Members need to be aware of the flip-side to higher growth investment options — higher variability or volatility in returns. Whilst higher growth options can be expected to perform better in strong markets, they are also likely to perform poorer in weak or volatile markets.

Members must have options made available to them that are true to label. It is fine from a marketing perspective to label an option as balanced, growth, diversified or active, as long as there is a clear underlying sub-title that states within fairly tight bands what the option really has in terms of exposure to growth and defensive assets, so that members can better select the option that fits their risk profile.

To date, the industry and the regulators have had a clear priority on fee disclosure being simple and easily understood by members. While this is admirable, there seems to be little benefit in having a simplified and clear fee disclosure regime if members then select the wrong options, or worse still, the wrong fund, based on a comparison of investment returns that is neither clear or simple.

The same logic referred to with balanced options must also apply to all other options offered by superannuation funds.

We recently carried out an exercise for a fund reviewing the various share options offered by their competitors. While most funds had a benchmark allocation of 95 per cent or higher to their share options, one fund had an allocation of only 85 per cent to shares. While members may not fully realise the implications of this mis-description, I feel it is neither professional nor satisfactory.

Consumer confidence in superannuation is largely the responsibility of the industry in ensuring that members and potential members join funds and select options on the basis of adequate and clear information. To date, the wholesale superannuation industry in particular has largely escaped the attention of litigators and class actions because of the high standards that have been set.

We need to continue to maintain these standards by ensuring all disclosures can be understood by the average person.

When it comes to investment options, I believe we have a duty to ensure that if a member is selecting Fund A over Fund B, they are given the right information, and are comparing apples with apples. As it stands today, too many comparisons, and potentially significant long-term financial decisions, are being made on the strength of descriptions that are not as clear as a member with limited financial knowledge and resources would reasonably expect from a professional industry.

Russell Mason is principal of Mercer Human Resources Consulting