APRA heat maps put performance of super funds under spotlight

The Australian Business Review

16 December 2020

Glenda Korporaal – Associate Editor (Business)

The federal government’s push for more mergers in the superannuation industry and weeding out underperforming funds takes another step forward this week, with the release of the second annual “heat map” on performance by the Australian Prudential Regulation Authority.

Friday’s announcement will focus on the $750bn MySuper sector with the release of the latest heat maps, which will assess more than 80 MySuper funds by their investment performance, fees and “sustainability” for the financial year to the end of June.

This week will be the second year in which APRA has released the so-called heat maps (which colour-code funds in terms of how good or bad they have ranked) in the three areas.

More specifically, the maps will cover a fund’s investment performance over three and five years, administration and total fees and a fund’s sustainability, including net cashflow.

There is also speculation that APRA might include other measures of investment performance, possibly to support the proposed eight-year performance metric to be used in the upcoming Your Future, Your Super comparison tool announced in the October budget.

Rice Warner superannuation specialist Steve Freeborn says the new heat map details will reflect funds’ investment performance that includes the first months of COVID-19, when markets suffered a sharp downturn before recovering.

They could also provide insight into whether funds have been able to reduce their fees in the year since the last heat maps.

Rice Warner has observed that a number of funds that were highlighted as having relatively high fees in last year’s heat map have undertaken reviews of fees.

But as they have only implemented them after June 30, changes will not be reflected in the latest heat map results.

A number of other larger funds, Freeborn notes, have continued to promote the benefits of their scale and cut their fees, particularly their MySuper investment fees.

In theory, heat maps are supposed to provide guidance to super fund trustees on how their funds are performing relative to other funds in the market.

Together with member outcome statements that need to be produced by super funds, they are supposed to provide the basis for conversations between APRA and the funds over their relative performance.

But critics argue that the maps provide no accountability for risk.

A fund could achieve good returns in one year, with some risky investments in a rising sharemarket, while other investors may decide to opt for lower performance but ones that make safer investment bets.

Higher returns can be correlated with higher risk (think bitcoin), which is not something that all super fund members wish to bear.

The now annual APRA heat maps are just the start of the super fund battle ground between the industry and regulators of the $2.9 trillion super sector.

The first few months of next year will see if the federal government decides to move to overturn legislation that would result in the compulsory superannuation guarantee levy rising from 9.5 per cent to 10 per cent in July.

The Morrison government has paved the way for an argument against it, on the grounds that it could cost workers wage rises that are better off in their own hands than locked up in super savings.

But there is also a realisation that despite the relief-driven optimism of the closing months of 2020 as Australian borders open up, 2021 is not going to see wage increases for many workers.

The argument now gaining ground, particularly with the union movement, is that it’s better to see a 0.5 per cent guaranteed increase in super contributions than no wage increase at all next year.

While the super levy has stayed steady at 9.5 per cent for the past few years, it has not been accompanied by rising wages.

The Morrison government is not an enthusiast for compulsory super, but the fact that the increase is already legislated could make it hard to stop the rise to 10 per cent in July.

But it could well move later to overturn the subsequent stepped rises to 12 per cent by 2025.

The May budget is also shaping up as another test of the Morrison government’s views on super.

After a drain of almost $40bn in early access to super allowed because of COVID-19, there is a concern that the budget could allow early access to super for deposits for first-home buyers.

But such a move would not do much for housing affordability and risks undermining the concept of super as a compulsory savings system that needs to be preserved until retirement.

Next year will also see more detail on the federal government’s push for more aggressive comparisons of super fund performance.

The government announced a package of changes to super in the October budget designed to improve the efficiency of the sector and provide consumers with more transparency to be able to compare fund performance.

Under the changes outlined in the budget, super funds will need to compare their investment performances against certain announced benchmarks, depending on which sector they invest in. The comparisons will need to be made over an eight-year period.

Funds that underperform their constructed benchmark by more than 50 basis points will need to write to members and tell them of their “underperformance”.

If they underperform for two years in a row they can be blocked by APRA from accepting new members into their default My­Super product.

While the move is aimed at discouraging underperforming super funds, the details have prompted criticism from fund managers, who argue that they will encourage super fund trustees to take safe bets and follow an index rather than take risks with a goal of achieving better performance over the longer term.

The new legislation to bring in these comparisons is still in the consultation phase, but is set to come into force from July 1.

The early access to super and some falls in financial markets have seen the first annual fall in super fund assets this year, after decades of continuous growth.

The latest figures released by APRA show super fund assets of $2.9 trillion at the end of the September 2020 quarter, a 1.6 per cent fall over the year.

The figures show it was the low-budget MySuper sector that has been most affected by early-access withdrawals.

Total assets in MySuper products totalled $754bn at the end of the September 2020 quarter — a 3.3 per cent fall in total assets in this sector over the prior year.

The MySuper heat maps will reflect a volatile investment markets in the six months to the end of June.

The latest APRA figures show super fund investment earnings were positive in the September 2020 quarter, at 1.9 per cent on average for funds, following a 6 per cent increase in the June quarter.

This has helped the recovery from the negative 10.3 per cent average return in the March quarter.

Just how each MySuper fund has performed amid this volatility will be under the spotlight this week, setting the scene for ongoing debates between government, regulators and the industry.