Two-stage process needed for super performance test

The superannuation performance test should be conducted in a two-stage approach and assessed by a panel of experienced industry professionals who are impartial, according to the chairs of major super funds.

In a submission to the government’s Your Future Your Super legislation, the chairs of Aware Super, Cbus, HESTA, QSuper, REST, and SunSuper said the performance test stages should be the benchmark test and an independent assessment.

They proposed the process would be:

• Stage one – Benchmark Test: We propose that funds be subject to the performance benchmark test along the lines as proposed in the bill, (amended to account for the matters raised in other public submissions), and that the amended benchmark be used as the first hurdle. APRA would have the responsibility for the implementation of this Stage one Benchmark Test; and
• Stage two – Independent Assessment: A second hurdle would then apply. Funds that fail the first hurdle would then be required to be assessed by a panel of industry experts. Its task would be to assess whether the performance identified by the first hurdle could be explained by factors that would be likely to continue to deliver underperformance, and importantly would also make the assessment as to whether performance has met the objectives the fund as communicated to its members. This would be a core consideration of the panel in assessing a fund.

The panel, they said, should be comprised of people who had an in depth understanding of the funds management business, the objectives of super, and a clear sense of the policy objective of reporting rigorously and independently on performance will be the most effective way of implementing and supporting the objective of implementing the government’s policy objectives.

They also said an example criteria for the assessment would be:

• The appropriateness of the Fund’s long-term investment return target and risk profile;
• The superannuation fund’s expected ability to deliver on the default product’s long-term investment return target, given its risk profile;
• Strategic and Actual Asset Allocation;
• Market conditions impacting returns across asset classes;
• The appropriateness of the fees and costs associated with the product, given its stated long-term investment return target and risk profile;
• Whether the superannuation fund’s governance practices are consistent with meeting the best financial interests of members of the fund;
• The administrative efficiency of the superannuation fund; and
• Any other matters the panel considers relevant.

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The chairs noted the panel should advise on the determination for the asset class performance benchmarks including appropriate unlisted benchmarks, and overall fund performance targets, as part of the first hurdle criteria.

“We wish to make it quite clear that our proposal for a two-hurdle approach is not to evade clear accountability. We believe that poor performing funds that do not meet their promise to members should not be entitled to receive funds flow from a government mandated system,” they said.

“Indeed, the second hurdle will be particularly imposing for those funds that are called before the panel. No fund would want to get into that position.”