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The Your Future, Your Super (YFYS) legislation was introduced to protect Australians' retirement savings by holding trustees to account for the investment performance they deliver and the fees they charge to members.
The performance benchmark is predicated on the view that passive management is low-cost and achieves performance in line with the market. This should be the minimum return achieved for all default members in the superannuation system.
The Coalition government supported Treasury’s use of a range of investment indices and cost benchmarks, against which to measure net superannuation fund performance. Funds which were more than 50 basis points (0.5%) a year below the performance measure over rolling 8-year periods would be named and shamed and be required to write to their members informing them that they have failed the test. Even in its short-lived existence, experience has been that this does lead to increased member-initiated exits. If a ‘failed’ fund does not pass the performance test the following year, the fund will then be prohibited from accepting new default members.
In addition to the performance test, funds continue to be subject to a multitude of other performance measures:
On the last two points, it appears that members do look at the previous year’s return and are especially likely to compare it against competitors whenever the return is negative. Further, those few funds which achieved a positive annual return to 30 June 2022 received considerable attention, even though the emphasis should be on much longer periods for comparative purposes. Such comparisons do little to build understanding of investment risk and it is difficult to determine the sustainability of returns.
The government has recently announced a delay in extending the YFYS performance testing regime beyond the main MySuper strategy. The delay will allow the new government to consider what tests should be applied to Choice options, and what options should be measured.
The superannuation industry has highlighted several potential anomalies with the YFYS performance testing regime. These include:
Most importantly, the current YFYS framework does not resolve – nor even attempt to resolve – how to measure the effectiveness of Strategic Asset Allocations. With SAAs being the primary driver of long-term returns, this gap is a fundamental and critical flaw in the current framework. Correcting this will require going beyond incremental tweaks to the current technical methodology.
Improving performance in one year isn’t always enough – a fund could improve and still fail. For example, the most recent year could be outweighed by losing an even better year from the start of the measurement period. Conversely, it could have a mediocre year and pass due to an especially bad year dropping off from the start of the measurement period.
There may also be tensions between YFYS in its current form and:
These ancillary objectives do not sit easily with measuring performance against indices based on the market capitalisation of securities. Even if a fund is confident that an investment is appropriate in the long term, volatility both in asset values and in benchmarks mean the fund’s allocations will be constrained by the performance test.
Many funds have a good buffer relative to the performance test, which means they can afford to take measured risks while this remains the case. Ironically, sensible risks can help to outperform the market. Funds are likely to benefit from:
Some further practical steps which funds could take include:
Andrew is a partner in Deloitte’s Melbourne office in the Actuarial Consulting practice. Andrew has spent more than 30 years advising clients on superannuation, life insurance, employee benefits, risk management, investments and talent management. During his career, Andrew has also driven research and public policy in various areas of interest, including retirement income products and solutions, retirement adequacy, member disclosure and advice, member engagement and digital solutions, governance and managing conflicts.
Steve is a partner in Deloitte’s Sydney office in the Actuarial Consulting practice. Steve has over 25 years’ experience in the financial services industry across all parts of the value chain, bringing a high level of market knowledge together with a deep technical knowledge of the superannuation, insurance and investment industries and participants. Steve’s areas of focus include: Member engagement, including tools and calculators to support our member research. Operations/ operational efficiency, including development of target operating models, support around regulatory developments, benchmarking and tenders of and for third-party service providers, and remediation activities. Product and proposition, including strategy development and M&A support, product development and validation, and market entry strategies.
Michael is a Principal in Deloitte’s Sydney office in the Actuarial Consulting practice. He has over 25 years’ local and international superannuation and investments experience. Michael leverages financial models to deliver practical insights for clients. Michael’s experience includes playing leading roles in: Investment product development and management across MySuper strategies, Choice menus, cash, guaranteed products and retirement solutions. Actuarial advice on defined benefit superannuation arrangements and other long-term cash flows. Reviews of significant service providers and optimisation of engagement models across asset consulting, administration and custody. Resolution of disputes and advice on remediation exercises where needed. Mergers and acquisitions, covering employee superannuation arrangements in corporate transactions, fund mergers and M&A activity of service providers.