Dud super funds manipulate fees and reclassify investment assets to lower the hurdle they must clear on a government super test, new analysis shows.
Industry Super Australia (ISA) analysis of the of the Your Future Your Super test results shows many poorly performing super funds gamed the test by shifting assets to categories with lower-return benchmarks and exploiting a fee loophole that boosted their test score without a reduction in overall fees or an increase in investment returns to members.
In two years of benchmarking the gap between the worst performing MySuper products and the best has not closed - and overall, the sector's performance has not improved.
The lack of investment performance improvement is partly due to test manipulation.
To end the gaming and put the focus back on member outcomes ISA's submission on the review of the Your Future, Your Super performance test's methodology recommends a re-designed assessment that measures funds against a simply constructed portfolio of shares, fixed interest and cash.
Just before the inaugural 2021 benchmark 35 funds reclassified investment assets, many reduced exposures to 'Other' assets with a higher 5.1% benchmark while increasing exposure to the lower benchmarked fixed income (1.8%) asset class and cash.
There may be some legitimate instances to change asset allocations, but the result was that funds boosted their test score without increasing returns to members.
The previous government's decision to only include one year of administration fees and, not the full eight years that all other metrics are measured, has made the test ripe for fee gaming, allowing some funds to reduce administration fees but hike other charges.
This fee loophole has improved the test outcomes by an average of 0.06% overall, yet it increased scores of corporate MySuper products by 0.10% and 0.20% for retail MySuper products on average.
Six products passed the 2022 test that would have failed if all eight years of administration fees were included and benchmarked against the median member administration fee.
There were 13 funds that decreased administration fees with either no change or an increase in total charges.
One of the drivers of investment performance is the strategy funds set to decide how they allocate capital, yet investment strategy and capital allocation are not measured by the benchmarks.
Instead, funds are evaluated on a benchmarked against their asset allocation. A fund fails if they fall 0.5 percentage points below their benchmark and must write to members encouraging them to switch, consecutive failure results in the fund being closed to new members.
The test methodology should change to a simple naïve benchmark, which would end test manipulation by measuring what value trustees make for their members above a simply constructed portfolio. This would also measure performance in easy-to-understand dollar values rather than percentage points.
To show how this benchmark would work Industry Super Australia constructed a benchmark of 70% equities and 30% fixed income and cash assets for a member with a $50,000 balance.
Outcomes at a member-level vary significantly from a loss of almost $7,000 over 8 years from the worst product to a gain of $17,600 for the top performing product – a difference of almost $25,000.
To improve the Your Future, Your Super reforms changes should also be made to the test outcome, its coverage, and the stapling reform, including:
- Stiffening the penalties so that any fund that fails the test consecutively is closed and its members are transferred to a product that exceeds benchmarks.
- Expanding benchmarking to all APRA regulated products – including choice products and those in the retirement phase as soon as possible.
- Amending the test outcomes so that funds either fail, pass, or exceed the benchmark, with only funds that exceed benchmarks not facing consequences.
- Only 'stapling' members to a fund that passes the performance test.
Comments attributable to Industry Super Australia deputy chief executive Matt Linden:
"This assessment has allowed too many dud funds to bend the rules, so they pass, leaving their members with the same lousy returns and high fees."
"While some funds cut fees to pass the test, many of them are still delivering poor returns to their members."
"Performance testing is a good thing, but to unlock its full potential funds should be measured on what value they are adding to their members retirements – not how they can game the system."
