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Anatomy of a flunked super fund: Charts of the week

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Selecting a superannuation fund is one of the most important financials decisions Australians will make. Yet in an industry plagued by apathy, most Australians stick with the fund chosen by their first employer, instead of shopping around for the best performing, lowest cost product.

But this month, up to a million Australians will receive a letter from their super fund telling them they’re in an underperforming fund and urging them to switch.

This is all part of the government’s superannuation industry reforms. Those letters are the result of a key plank of its Your Future Your Super legislation : performance tests for MySuper products.

The first set of results were released last Thursday by APRA. While most funds passed the test, thirteen, loaded with $56 billion in retirement savings, were found wanting.

The test compared the investment performance of each MySuper fund with a benchmark specific to its investment strategy. Balanced strategies versus a balanced benchmark and so on.

Funds can’t keep the results quiet. They must now mail members the results and suggest they switch funds. Funds which fail for a second year in a row will be banned from accepting new members.

“Your superannuation product has performed poorly under an annual performance test …,” the strongly worded letter reads.

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“As a result, we are required to write to you and suggest that you consider moving your money into a different superannuation product.”

Today, in Charts of the week we dive into the results of the inaugural test and the super products that passed and failed.

The $56 billion in superannuation dollars that sits in flunked funds is about 6.5% of all the funds held in MySuper products. The one million accounts probably represents less than that many people due to members having multiple accounts.

The average return for the funds that failed was 1.1% lower than for those that passed. Performance varies considerably across the 80 MySuper products, ranging from 9.46% for Active Super to 6.02% for Energy Industries Superannuation, annualised over the previous 7 years.

Investors should be cautious comparing returns as they are not always “apples with apples”. Funds employ different strategies taking different levels of risk. Funds with a higher proportion of growth assets, like equities, will have outperformed in recent years, but at the risk of greater volatility.

Products from retail fund giants like Commonwealth bank and Colonial First State were among the thirteen funds pinged by the regulator. Industry super funds such as the Labour union Co-Operative retirement fund and Maritime Super also failed.

The test only assessed MySuper products, which make up about forty per cent of total superannuation assets.

MySuper products were enacted in 2012 to provide Australians with simple super products that conform to government rules around fees, investment options and ease of comparison.

From 2014, only funds operating MySuper products were eligible to receive default super contributions for new employees, and from 2017, all accounts in default investment options were required to be invested in MySuper products.

Most funds offer a MySuper product in addition to others. For example, Australian Super’s balanced option is a MySuper product while its Socially Aware option is not.

Only MySuper funds can receive default super contributions for new employees. They receive most new contributions, but 60% of total assets in superannuation still sit in non-MySuper products.

The government plans to expand performance testing to the broader universe of superannuation funds.

Not without controversy

While most agree with the need for reform, not everyone is happy with the government’s approach . Some have emphasised the difficulty of assessing performance across tens of funds with different styles and risk levels. Some argue APRA is being too lenient and should assess funds against an absolute performance benchmark, not their chosen strategy.

The decision to assess funds against their chosen benchmark can lead to unexpected results. A fund which returned 10% versus a benchmark of 11% would fail the test, while a fund which returned 6% against a benchmark of 6.1% would pass. These are the kinds of inconsistencies critics point to.

With performance tests for non-MySuper funds still to come, watch this space.

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