Two years after the Australian Prudential Regulation Authority (APRA) advocated better guidance on the appropriate risk levels for investment options within super, concerns have been raised that the industry has yet to properly address the matter.
In its letter to trustees in June 2010, APRA stated that, at the time, there were no standard risk descriptors or industry-wide standard asset allocations for different labels such as conservative, balanced and growth, which "leads to confusion on the part of fund members and makes it difficult to properly compare investment performance".
"APRA is not, currently, suggesting guidance on the risk level appropriate for labels…this is something we would expect the industry to develop good practice material around over time," the regulator wrote.
Since then, the Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) have developed a ‘Standard Risk Measure’ framework, whereby super funds will be required to disclose the level of risk each option carries.
While the solution has been endorsed by APRA and is due to kick off on 22 June this year, creating standardised definitions of investment options has not been discussed.
Recent analysis by SuperRatings found AustralianSuper, Cbus, REST and BT Bus Super all had similar exposure to growth assets in their default options (between 74 per cent and 78 per cent), but each fund labelled their option differently.
Super Ratings managing director Jeff Bresnahan said the labelling inconsistency could sometimes mislead super members.
"The overall picture is that there is no consistency in labelling in the industry, and that’s something we need because consumers quite rightly have an expectation that all balanced funds would be very similar, and they’re not," Bresnahan said.
"Let’s say for example that investor A placed their funds in a 50/50 [growth-defensive split] balanced option and investor B placed their funds in a 80-20 balanced option.
"Investor B – using historical returns – would retire with a lot more money than investor A, but they both thought they were in the same thing," he added.
Both Bresnahan and Chant West managing director Warren Chant have called for the regulator to step in and create standard definitions of investment labels.
"The only way we are ever going to get consistency is for APRA to consult the industry, then come out and say ‘this is how you do it’," Chant said.
"If you want to educate people about investment and superannuation, you need some consistency," he added.
"By having common labels and clearly stating what they mean, it is going to be easier to communicate to members, but I don’t think it would change the way funds manage money."
Neither ASFA nor FSC were available for comment on this matter at the time of publication.
