Category: Features

APRA super heatmaps reveal a quarter of choice super products ‘poor’

The Weekend Australian

18-19 December 2021

Richard Gluyas – Business Correspondent

The Australian Prudential Regulation Authority’s review of superannuation member outcomes revealed that poorly performed choice products were concentrated in the hands of eight trustees.

More than 60 per cent of investment options in the prudential regulator’s first heatmap for the choice superannuation sector failed to meet benchmarks, with one-quarter delivering “significantly poor performance”.

The choice sector, where members make an active decision to invest and have a wide range of investment options, is now expected to go through the same process of product closures and fee reductions as the MySuper sector after publication of its first heatmap in 2019.

Since then, 22 MySuper products, comprising 1.3 million member accounts and $41.8bn in member benefits, have closed, with three of them failing the new “Your Future, Your Super” performance test this year.

The Australian Prudential Regulation Authority’s review of superannuation member outcomes, released on Thursday, also revealed that poorly performed choice products were concentrated in the hands of eight trustees.

Of the eight, Christian Super, EISS and Australian Catholic Super had a MySuper product that failed the performance test as well.

In aggregate, the two heatmaps cover about 60 per cent of member benefits in the $3.4 trillion, APRA-regulated super sector. The inaugural choice heat­map focuses on multi-sector investment options in open, accumulation products, excluding platforms, representing 40 per cent of total member benefits – about $394bn – in the choice ­segment.

APRA executive board member Margaret Cole said the regulator would now intensify its supervision on the trustees of products delivering substandard member outcomes, with the new choice heatmap expected to have a similar impact to the MySuper exercise.

“With a legal duty to act in their members’ best financial interests, all trustees should now be scrutinising the heatmap findings to assess the outcomes they are delivering members, better understand any drivers of poor performance and then taking prompt action to address areas of concern,” Ms Cole said.

“If they are unable or unwilling to do so, they need seriously to reconsider whether their members would be better served with their money elsewhere.”

 

Superannuation members also deserved to have confidence that their retirement savings were being well looked after, regardless of what type of fund or product their money was invested in.

“Although there have been benefits generated for members from industry consolidation and reductions in fees in recent years, these heatmaps show there remains considerable room for ­improvement in member outcomes,” she said.

“In particular, a sizeable proportion of the choice sector has been exposed for delivering poor outcomes, especially considering these products generally charge higher fees than their MySuper equivalents.”

The key findings from the latest refresh of the MySuper heatmap were that 45 per cent of products, or 31 of 69, delivered returns below APRA’s heatmap benchmarks.

Investment returns were found to be the main driver of underperformance and while fees and costs were falling, there was still “considerable scope” for more reductions.

The heatmap incorporated 75 MySuper products covering 14.2 million member accounts and $853bn in member benefits.

The first annual Your Future, Your Super performance test for MySuper products was conducted in August, consisting of an assessment of investment performance and administration fees.

The test found that 13 MySuper products failed, comprising one million member accounts and $56bn in benefits.

A further seven default products only “marginally passed” the performance test, including $67bn industry fund Rest Super, which has 1.8 million members.

Most of Rest’s members are in the default product.

APRA said it expected trustees to improve the performance of all underperforming products “in a timely manner” to protect all members. “This is particularly the case where the product has failed consecutive performance tests and becomes closed to new members, which may result in further sustainability challenges for the trustee,” the regulator said.

APRA said the impact of staying in a poorly performed superannuation fund was significant.”

Frydenberg, Hume must force all superannuation funds to disclose their unlisted property, other assets

The Australian

1 November 2021

Robert Gottliebsen – Business Columnist

As industry and retail superannuation funds plan to increase their investment in unlisted securities, APRA and ASIC have disclosed dangerous gaps in the valuation processes of some of the funds and the willingness of some executives, trustees and their spouses to engage in a form of insider trading to take advantage of those bad valuation practices. It is the long term fund members who have been hit.

That means Treasurer Josh Frydenberg and Superannuation Minister Jane Hume must step in and look after members by forcing all funds to disclose their unlisted property and other unlisted assets; the valuation of each of these investments; the regularity of investment review: and in the case of income producing property the yield that is used to calculate the value. This is an absolute minimum. There is a good case to follow the US and demand details of all transactions. While most members will not read the disclosures, they will enable analysts and journalists to undertake the much needed task of monitoring fund valuations.

The existing legislation appears to already require the funds to disclose unlisted holdings and their values but the regulators have not enforced it. Clear regulation is urgently required and later changes need to be made to the legislation to stop the director/trustee rorts — albeit that a only small minority have abused their power and taken advantage of the doubt as to whether insider trading laws apply to superannuation funds when trustees, directors and their spouses switch their fund holdings to under valued unlisted assets.

For more than a year the ALP and some superannuation fund executives have been campaigning to prevent their members from being told the values of the properties they own and how those values were arrived at.

Among the superannuation executives who have been campaigning are people I respect and I am sure they had no knowledge of the dreadful practices that have now been revealed by APRA and ASIC.

The ALP appears to have been motivated by the cash it receives from unions.

Whether it be the superannuation fund executives or the ALP, the arguments they used to prevent disclosure were dubious at best.

In unlisted property trusts it is common not only for the individual property valuations to be revealed but also the yield which is used to calculate those property values. Naturally these values change especially in times when there are sharp fluctuations in interest rates as we have seen recently.

Superannuation funds every day are paying out pensions and lump sums to retiring people and at the same time taking in funds. It is totally unfair not to have up to date valuations on all unlisted assets — especially when there are major changes — because without them either the buyer or the seller is in danger of being disadvantaged.

Some of the arguments used to urge the government not to do the right thing by superannuation members by not disclosing valuations make no sense at all. For example it was even suggested that disclosure would impact the ability of a fund sell an asset. Buyers of a particular property will want to know the rental income and will make their own judgment on recent sales and yields in the sector. Book values of the non listed assets in a fund change regularly so the way the property is listed in the books is almost an irrelevancy in the sale process.

Meanwhile, the findings of APRA and ASIC are sickening given this is a $3 trillion industry where members trust their directors and trustees to undertake proper valuation processes and not to turn bad valuation methods to their own benefit.

APRA found few big superannuation funds had “robust, pre-existing frameworks for implementing, monitoring and reverting to regular valuation approaches following out-of-cycle revaluation adjustments” — ie they did not quickly adjust unlisted asset values when there was a major rise or fall.

Among the APRA discoveries were: the absence of formalised monitoring processes for valuation adjustments; no framework for the alteration of valuation adjustments; inconsistent valuations for different classes of unlisted assets; and board and management time dedicated to devising processes, rather than considering and challenging valuations

This is elementary stuff.

Then ASIC discovered how some trustees, directors and their spouses abuse the consequences of this bad management.

An ASIC surveillance about personal investment switching by directors and senior executives of superannuation trustees has identified “concerns with trustees management of conflicts of interest”.

ASIC looked at a sample of 23 trustees (including trustees of industry and retail funds) and focused on conduct during the time of increased market volatility arising from the Covid-19 pandemic.

They often found “clear failure to identify investment switching as a source of potential conflict, resulting in a lack of restrictive measures and oversight to adequately counter the risk”.

“This is very concerning given the level of sophistication and governance required of trustees when managing millions of dollars in assets on behalf of fund members.

“The superannuation funds had failed to identify investment switching as a risk and there was a disparity in board level engagement, lack of restrictive measures and in adequate oversight of investment switching and lack of oversight of related parties”

Frydenberg and Hume have done a wonderful job cleaning up the superannuation industry to the benefit of members but there is more work to be done.

Super test failures ‘looking to merge’, says APRA

The Australian

28 October 2021

Patrick Commins – Economics Correspondent

Five of the 13 super funds that failed this year’s inaugural ­investment performance test are actively looking to merge with other funds, APRA has said.

The Australian Prudential Regulation Authority chairman Wayne Byres told a Senate estimates committee hearing on Thursday that “the trustees of those 13 products now face an important choice: they can ­urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for their members”.

APRA figures from August 31 show there were one million members in the 13 super funds that failed the performance test, with assets totalling $56bn.

The trustees of the failed products included some big names, including Colonial First State and Asgard, alongside ­others such as Maritime Super and Christian Super.

The 80 MySuper products that were subject to the test represented 134 million members, with a combined $844bn in ­assets under management.

Recently appointed APRA member Margaret Cole said the actions the regulator was taking in regards to funds that flunked the test were “intensified supervisory activity and a great deal of contact with those trustees of those failed funds”.

Ms Cole said APRA had ­already received or expected to receive shortly “contingency plans” that would show how the trustees planned to improve their investment performance and pass next year’s test.

The Your Future, Your Super reforms, which kicked off on July 1, require APRA to conduct an annual performance test for ­MySuper products, which are also ranked via an online tool ­offered by the Australian Taxation Office.

From July 1, 2017, all member accounts in default investment options have been required to be invested in MySuper products, which are now subject to annual performance tests and ranked online. A fund that fails the performance test in two consecutive years is not able to take on new members, and will not be able to reopen to new members until their performance improves.

Ms Cole said the “biggest lever” trustees could pull to ­improve their performance would be to reduce fees – a key objective of the YFYS legislation.

Superannuation Minister Jane Hume noted that since the Morrison government introduced the reforms, 37 of 81 MySuper funds had cut their fees.

Ms Cole said “where it ­appears there will be difficulty passing next year’s test”, the regulator was pushing trustees to make an “appropriate” merger.

APRA puts more than 116 super funds on notice with retail sector in firing line

The Australian

20 October 2021

Cliona O’Dowd

The prudential regulator has taken aim at nearly 120 superannuation funds it says will struggle to remain competitive into the future, with the retail sector set to bear the brunt of the pain.

Australian Prudential Regulation Authority’s chief super enforcer Margaret Cole warned Wednesday that the sheer number of super funds and investment options in the market was a detriment to members. She said time was running out for 116 of 156 regulated super funds as mega funds bolster their position and influence.

While 17 super funds manage 70 per cent of all assets in the APRA-regulated system, a “shocking” 116 funds manage less than $10bn each, with the bulk of those — 78 in total — operating in the retail sector, Ms Cole said.

“It’s here in particular where we can see the potential vulnerabilities the retail sector faces in coming years,” she told a Financial Services Council event.

“Size is not the sole determinant of performance … But it is absolutely a key factor influencing not only member outcomes, but also the sustainability of outcomes into the future.”

Ms Cole, who was appointed to the regulator for a term of five years from July 1, said increased scale allowed trustees to spread fees and costs over a larger membership base while accessing higher earning investments in unlisted assets, such as major infrastructure projects.

“APRA doesn’t have a rigid view of what size a funds needs to be to compete with the emerging cohort of so-called “mega-funds”, but we broadly agree with industry sentiment that any fund with less than $30bn may struggle – and any fund with less than $10bn, without some other redeeming feature, will definitely struggle to stay competitive into the future,” Ms Cole warned.

 

The performance and sustainability challenges facing the smaller end of the industry long tail will not get any easier, she told the audience.

“If anything, they are likely to accelerate, as the mega-funds use their financial strength and higher profile to grow further by attracting new members, and fund stapling breaks the traditional nexus between employers and default super funds.”

Greater transparency, through APRA’s heatmaps and expanded data collection, and the recent Your Future, Your Super reforms, would make it easier for workers to identify the poor performers, and move their money elsewhere, she predicted.

Already, all but one of the 13 funds that failed the first MySuper annual performance test had seen a decline in membership, she revealed.

The named-and-shamed funds that failed the test include AMG Super, LUCRF, Colonial First State’s First Choice Employer Super Fund, Maritime Super, Christian Super and Commonwealth Bank Group Super. (See the full list here.)

“These drops are marginal to date but any reduction in scale is unhelpful for trustees trying to improve their performance,” Ms Cole said.

APRA is watching for a similar response when the results of the first performance test for choice products are published next August.

At the other end of the spectrum, the nation’s largest super funds are gaining 1000 new members every day, and $500m of net new cash flow each week, she noted.

“The funds (members) move to will often be those brands they are most familiar with, further bolstering the influence of the largest funds,” Ms Cole said as she pointed to the problems besetting the retail sector: substantially higher average administration fees than for MySuper products; far greater variation in performance; and significantly higher levels of underperformance

“The challenges many retail funds face will become evident in coming weeks when we publish the findings of APRA’s new information paper analysing the choice sector in preparation for our first choice product heatmap in December,” Ms Cole warned.

While the regulator’s analysis covers choice products in all industry sectors, including industry funds, the majority of products and options analysed were operated by retail funds.

As consolidation in the sector ramps up, Ms Cole warned smaller funds against “bus stop” mergers, telling them to join forces with larger, better performing funds.

Ms Cole also took aim at the sector’s “serial acquirers” who take over one fund after another and often move on to a new deal before bedding down the previous one.

“Given the time and cost involved in executing a merger, it’s vital the benefit to members isn’t squandered through poor execution or deferral of the integration needed to avoid problems down the track.”

Retail funds, in particular, should consider the benefits of consolidating their own product lines, she said.

How to future proof your super

The Australian

3 September 2021

James Kirby – Wealth Editor

If you consider that we have a compulsory system where everybody has to put away 10 per cent of their earnings into a super fund, it’s hard to believe the wider public had no way of comparing their fund’s performance until this week.

The release of the government’s super fund performance figures – and importantly the decision to name and shame the worst funds – is a genuine breakthrough. The trillion-dollar question now is what happens next?

It’s worth picturing what is going to occur when more than a million households will soon receive a letter from their fund telling them the most important investment in their life (outside of their home) is in a ‘dud’ super fund.

We should not be surprised if there is uproar from this unfortunate constituency where people who may not always keep up to date with the super industry will be confused and angry.

What’s more this group of stranded investors is going to get a lot bigger in the near future when the exercise is expanded to include all super funds.

In this first version of the performance assessment 13 funds out of 76 in the MySuper category failed to pass industry standards. (If you want to compare your current super fund and see how it fared alongside the 13 loser funds tagged as ‘underperforming’ then simply go to ato.gov.au and it’s all there under ‘YourSuper comparison tool. The best way to do this is to use your MyGov personal password if you have got one of those.)

Within those funds are big names. There are funds linked with CBA and Westpac along with well known industry funds such as the Maritime Super.

Importantly, the majority of the investors stuck in these loser funds were in so-called retail funds from banks and insurers. As expected, non-profit industry funds which often have trade union links were the overall winners.

So what are you supposed to do if you find you are in a dud fund? Should you contact the fund where some call centre operator will probably read a script telling you things are about to get better.

Should you pull out of the fund and move to one that has a better record. You will have to expect that the fund you pick this year (which will be on the basis of its recent performance) turns out to be just as successful in the future. Remember, statistics strongly suggest the winners of today are rarely the winners of tomorrow.

Or maybe you turn your back on institutional super entirely by opening a self managed super fund.

Top advisers suggested this week there could be a material increase in SMSFs when people realise they are in dud funds.

Perhaps this will happen, but you have to ask, would an SMSF be the right choice for people in this situation? Even if they were capable of running an SMSF would it be economically feasible? You need to digest costs of $3000 a year in fees to make an SMSF really work and that rarely makes sense for anyone with less than around $600,000.

Certainly people are more likely to switch funds if they are seriously worried – we know for example that switching activity inside big funds tripled in the immediate aftermath of the sharemarket crash last year.

What to do?

It just so happens that the super system is about to experience some very big changes that are mostly for the better. In a few weeks time – November 1 – the old arrangements where each successive employer could default workers into a different fund is due to formally end.

Combine this new era of stapled super (where you can choose to take the same fund with you through your working life) together with regular publication of performance tables and we are going to get a much more active super investing public.

This is the perfect juncture to explore the idea of a national super fund – a fund that would be run by the government and very likely managed by the Future Fund.

The idea has been bounced around for some time. However, ‘big super’ – industry or retail – does not want to hear about it. Similarly, Self Managed Super Fund professionals won’t like it because people might surrender their SMSF management to a government fund faster than an institutional fund – especially if it is run by an operation with scores on the board.

To be precise, first the government would have to launch the concept and kickstart a fund. It would then have to put the management of the fund out to tender. Under current circumstances, the Future Fund would simply have to win the mandate because it’s returns are exceptional. Across the spectrum, the worst super funds have been doing about 6 per cent, the best have been doing closer to 9 per cent – the Future Fund has been doing 10.1 per cent.

For the investor the winning aspect of such a plan would be that the regular competition to win the right to manage the money would mean it is always underpinned by the best funds – the Future Fund might not always be top dog.

What we got this week is improved transparency in the superannuation system, but we have not seen substantial improvement in the system itself.

Every investor – the apprentice starting out, the young family with multiple accounts, the older couple petrified of low interest rates – are all still mandated to make a choice.

A national fund would allow them to join a fund that sits above and beyond the current choices.

Seven things we learned from the first superannuation ‘shame file’

The Australian

1 September 2021

James Kirby – Wealth Editor

The government’s debut list of dud superannuation funds offers key pointers to the realities of how your money may be managed in our compulsory system

Not a moment too soon the government has published a long-promised super fund performance table: Specifically the recent outcomes at 76 default ‘MySuper’ funds where 13 funds have failed to reach industry standards. It’s a landmark for super and the scheme is only going to get bigger and better. Here’s what we found out:

1. Brand names mean nothing.

Some of the worst performing funds among the 13 dud funds have been offered by the biggest names in the game. Remarkably, a wing of the nation’s biggest bank is here, the Commonwealth Group Super – Accumulate Plus Balanced fund. Similarly, BT – an operation at the heart of the financial services system and a wing of Westpac – is smack in the middle of the sucker list with Retirement Wrap – BT Super MySuper.

Don’t assume a well known name automatically offers a strong fund.

2. There are losers among both retail and industry super funds

Industry funds are the big winners in our super system over the last decade – especially since the Hayne Royal Commission humbled the big banks and insurance groups. But the new ‘shame file’ has both retail names such as Colonial First State FirstChoice Super Fund along with industry funds like the Maritime Super (MySuper Investment Option) and the LUCRF (Labour Union Co-Operative Retirement Fund) MySuper Balanced fund.

3. Savers inside these funds need to be rescued

The government hopes funds which have been cast among the dud list will improve their game or get taken over by larger entities: This might be wishful thinking. A fund that has lost the confidence of the wider market will find it hard to regain momentum. Meanwhile, though large funds might cherry pick among the losers, there is no guarantee the worst funds will be acquired by bigger operators – there will need to be further incentives to get these dud funds to pack it in.

4. Loser funds always say the same thing

Some years ago when it was extremely difficult to compare super funds The Australian – using figures from the prudential regulator – published an extensive performance table of super funds. For weeks afterwards the worst performing funds complained loudly that the cut off point for performance was unfair. Others claimed that they had done wonderfully well since the day the regulator closed off the exercise, etc. The funds at the bottom of this week’s list are offering very similar explanations in their defence.

5. The comparison tables are free and easy to understand

The Australian Taxation Office has managed to present the performance figures very simply for free to anyone who accesses the tables through the MyGov website using their personal username and password.

Using the system on its debut day, the tables divide the funds between ‘performing’ and ‘underperforming’ – with a very useful 7-year net percentage return and fees comparison attached. What’s more there was no delay, crash or waiting time … hats off!

6. Some funds did not present their numbers

Even among the 76 funds that are examined, the regulator discovered that essential numbers were ‘not available’ among several funds which means an investor cannot make a full assessment: Here’s the funds – Mercer Super Trust (Virgin Money MySuper), Mercer Super Trust (Mercer Tailored CRG MySuper), Super Directions Fund (Water Corporation MySuper), the Retirement Portfolio Service- ANZ Smart Choice Super for QBE Management Services, Australia Post Super Scheme, and Australian Defence Force Super Scheme. For its part Mercer notes the performance test requires more than five years of data, and these two Mercer funds have existed for less than five years. Mercer notes that APRA’s separate assessment has the two funds listed as ‘Pass’.

7. It’s not perfect, but it will do for a start.

There are many failings in this exercise: Splitting funds into ‘performing and underperforming’ is simple and uncomplicated but then the process does not fully account for risk weightings or any scoring on the basis of Environment Social or Governance (ESG) considerations.

This is powerful public shaming: But more than a million investors may now realise they are in dud funds and on that basis alone the means should justify the end.

Failing products

AMG Super – AMG MySuper

ASGARD Independence Plan Division Two – ASGARD Employee MySuper

Australian Catholic Superannuation and Retirement Fund – LifetimeOne

AvSuper Fund – AvSuper Growth (MySuper)

BOC Gases Superannuation Fund – BOC MySuper

Christian Super – My Ethical Super

Colonial First State FirstChoice Superannuation Trust –

Commonwealth Bank Group Super – Accumulate Plus Balanced

Energy Industries Superannuation Scheme Pool A – Balanced (MySuper)

Labour Union Co-Operative Retirement Fund – MySuper Balanced

Maritime Super – MYSUPER INVESTMENT OPTION

Retirement Wrap – BT Super MySuper

The Victorian independent Schools Superannuation Fund – VISSF Balanced Option (MySuper Product)

Failing superannuation funds named and shamed

The Australian

31 August 2021

Cliona O’Dowd – Journalist

More than a million workers have entrusted their retirement savings to a dud superannuation fund, the results of the government’s new performance test show.

The new test, brought in as part of the government’s Your Future, Your Super reforms, reveals that 13 of 76 funds — or 17 per cent of those assessed — failed the crucial evaluation and will now have 28 days to write to their members detailing their failure and suggesting they switch funds to get a better retirement outcome.

The named-and-shamed funds include AMG Super, LUCRF, Colonial First State’s First Choice Employer Super Fund, Maritime Super, Christian Super and Commonwealth Bank Group Super. (See the full list below.)

All up, $56.2bn of 1.1 million workers’ retirement savings are invested in the underperforming funds, Treasurer Josh Frydenberg said.

“As part of the most significant changes to superannuation in nearly 30 years, the Morrison Government is holding underperforming funds to account and strengthening protections for the retirement savings of millions of Australians,” he said.

“Superannuation members can now access a single, trusted and independent source of information to compare superannuation products, including whether they are in an underperforming product.”

The MySuper products were assessed on both investment performance and admin fees. But while the investment portion of the test spanned the past seven years, only the most recent year’s admin fees were included, after a government backflip just weeks ago.

The longer time frame for judging investment performance was to allow funds to target long-term returns and not blame “one bad year” for underperformance, according to the government.

But the last minute change to the admin fees could see some dud funds slip through the cracks, critics argue.

The named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

If they fail again next year, they will no longer be allowed to accept new members. What’s more, the funds aren’t told why they failed: they are simply given a pass/fail mark.

Commonwealth Bank Group Super, the $12bn default fund for staff of the nation’s largest lender, said it failed the test “due to a number of underlying factors”.

These included differences in its investments compared to the benchmark, as well as underperformance of some of our investments.

“Group Super focuses on taking appropriate levels of risk with our investments in order to produce certain returns,” a CBA Group Super spokesperson said.

“Consistent with this, the MySuper Balanced option has delivered on its objectives set by the trustee board, delivering a return of 13 per cent for the 2020-21 financial year and in excess of 7 per cent over 10 years, and with less volatility compared to peers producing a smoother return experience for members.”

The fund’s 13 per cent return last financial year compares to the 20 per cent-plus the best in the industry delivered for their members.

Christian Super CEO Ross Piper said the test didn’t take into account that the fund, which manages $2bn on behalf of its 30,000 members, was one of the fastest growing offerings in the market as Australians increasingly seek out more ethical investments.

“While its intent is positive, its blunt design means all products under a certain benchmark are being tarred with the same brush without consideration for how those returns have been generated and whether the fund is, in fact, delivering far more than just strong long-term financial returns,” Mr Piper said.

Colonial First State CEO Kelly Power said its MySuper product had “narrowly missed” the test benchmark and was confident it would not fail two years in a row.

“We have just announced a further reduction to the administration fee charged on this product of almost $8m per year, effective from October 2021,” she said.

“This means FirstChoice Employer Super will have one of the lowest administration fees of any MySuper product, putting it among the top 10 funds, based on our analysis of recent Chant West data.”

APRA executive board member Margaret Cole said the failing funds had an important choice to make.

“They can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them,” she said.

APRA had intensified its supervision of the failed funds, which will now have to detail to the regulator the cause of the underperformance as well as how it will be remedied.

“Trustees have to monitor their products closely and report important information to APRA – including relating to the movement of members and outflow of funds,” Ms Cole said.

The results of the test should be treated with “extreme caution”, according to super fund lobby group ASFA.

“ASFA has long supported the orderly removal of habitually underperforming products, however some of those called out by this test are in fact good products which have delivered excellent returns to their members over a long period of time,” ASFA CEO Martin Fahy said.

“This is a retrospective, relative performance assessment where the so-called underperforming products are compared against top performing products.

“Any product that falls 0.5 per cent below the median is labelled as failing. What the published test results don’t tell members is why, and by how much, their fund has failed the test.”

Dr Fahy said the results of the test were potentially confusing for consumers. Indeed, a glance at the ATO Your Super comparison website, which lists all MySuper products and the test results, shows that some funds passed despite having higher fees and lower returns than the duds.

IOOF Portfolio Service Super, for example, has an annual fee of $627 and a seven-year net return of 7.38 per cent and passed the test.

But the Victorian Independent Schools Superannuation Fund, with a fee of $577 and a seven-year net return of 7.58 per cent, failed.

“This is the tyranny of benchmarks. They fail to take account of risk, lifecycle, or ESG screening considerations and instead they preference hugging the index,” Dr Fahy said.

Ahead of the results, Maritime Super CEO Peter Robertson called for urgent change of the assessment.

Maritime and other named-and-shamed funds will in the coming weeks send letters to members stating: “Your superannuation product has performed poorly under an annual performance test that was introduced by the Australian government … we are required to write to you and suggest you consider moving your money into a different superannuation product.”

This is potentially giving members bad advice and could lead to people being financially worse off in retirement, Mr Robertson said.

“We didn’t wait for the results of the performance test to investigate better options for our members. They’re already in a new product. Legally it’s the same product but fundamentally it’s the Hostplus pooled superannuation trust.

“Our fund has been assessed on investment strategies and risk overlays that are no longer in place, which have no relevance to future returns for members.”

Industry Super Australia chief executive Bernie Dean said he supported the introduction of “fair and appropriate” annual performance tests. But he pointed to shortcomings in its current form.

“The performance test recently introduced by the Government contains deficiencies that are not in the best financial interests of all super fund members and that will lead to outcomes inappropriately favouring some funds over others.

“This is a matter that ISA will continue to seek to have remedied,” he said.

Failing products

AMG Super – AMG MySuper

ASGARD Independence Plan Division Two – ASGARD Employee MySuper

Australian Catholic Superannuation and Retirement Fund – LifetimeOne

AvSuper Fund – AvSuper Growth (MySuper)

BOC Gases Superannuation Fund – BOC MySuper

Christian Super – My Ethical Super

Colonial First State FirstChoice Superannuation Trust –

Commonwealth Bank Group Super – Accumulate Plus Balanced

Energy Industries Superannuation Scheme Pool A – Balanced (MySuper)

Labour Union Co-Operative Retirement Fund – MySuper Balanced

Maritime Super – MYSUPER INVESTMENT OPTION

Retirement Wrap – BT Super MySuper

The Victorian Independent Schools Superannuation Fund – VISSF Balanced Option (MySuper Product)

Superannuation changes open windows to ‘your money’

The Australian

18 June 2021

Robert Gottliebsen

Most Australians who do not have a self-managed fund and who are accumulating superannuation savings don’t regard super as “their money”.

But, of course, it is very much members’ money and the wide-ranging, long-overdue superannuation changes that were passed by the parliament this week will cover 90 per cent of Australians in accumulation outside self-managed funds, so many more Australians will realise that superannuation is “their money”.

And self-managed funds are also helped.

The opposition to the changes was surprisingly ferocious from both the large retail and industry funds and their employer/union backers (plus the ALP), which indicates that there will be unpleasant surprises in some funds when some of the provisions are put into practice.

The changes would not have been possible but for the fact that Josh Frydenberg has become the first treasurer since Paul Keating to take an active interest in reforming superannuation.

And that is long overdue because superannuation savings are around $3 trillion. But the initial driver of these changes was Superannuation Minister Jane Hume.

What Frydenberg and Hume have done is to open a series of windows so ordinary Australians can see what is happening to “their money”.

And so the first big change is that the online accounts of the superannuation funds will tell members where “their money” is actually invested. They will also learn how much of “their money” is being spent on marketing.

Superannuation funds need to attract new members to maintain economies of scale because members retire, die or simply leave the fund. Accordingly some marketing is important but lavish marketing with executive side benefits will be revealed.

Members will also learn how much of “their money” is being paid to shareholders in the case of retail funds and employer and union groups in the case of industry funds.

The second window that is opened up is the ability to compare performances. At the moment superannuation is like insurance policies —the complexity makes it impossible to compare funds. What the legislation proposes is that if you have chosen, say, a conservative or high-growth fund it will be compared with funds with similar investment policies on a like-on-like basis.

For many Australians the first step in seeing superannuation as “their money” came when, in the pandemic last year, Josh Frydenberg gave them the ability to extract cash. But over the next year or so, when the data is assembled, friends will be able compare investment performance rates simply and straightforwardly over the barbecue.

These two measures will have a dramatic affect on superannuation.

But there is a darker side to superannuation in Australia that has taken too long to be fixed.

When Paul Keating set up the original superannuation structure it was based on a craft employment system and so most unions and their equivalent employer group had their own superannuation fund. So when a person started in the workforce in a coffee shop they joined Hostplus; then they went to Coles or Woolworths and joined a retail fund; if they did work on a building site it was Cbus and so on.

Millions of Australians ended up with savings in many different funds. Some of the amounts were small because the person did not work in that industry for very long. These savings get eaten up by administration, which represents a subsidy by young Australians for older Australians who tend to have a more stable fund.

In some industries such as retail and building it has been actually impossible for the employee to join any other fund. Earlier legislation blocked these cartels but there are still some legacy arrangements.

Apart from these cartel arrangements in most areas it has always been possible for people to consolidate their funds, but it tended not to happen. The new legislation provides that the first fund you join goes with you to the next job and so on. But, of course, you are able to switch should you be unhappy with your first fund, and given it will be possible to compare performances, there will be more shifting.

The government says it will save members $280 million so it would seem for some funds the removal of this subsidy will require costs to be reduced or performance after administrative costs will suffer.

That may be the reason for the ferocity with which the retail and industry funds plus employers and unions tried to stop this very logical and beneficial change to our superannuation industry.

It’s true there are areas of downside. It requires more work for small enterprises and Australian Taxation Office systems are unreliable. But the overall benefits are so huge that it is worth the extra time and ATO risk.

And finally, the area which has been given perhaps the most publicity is the ability of APRA to stop superannuation funds which are performing badly from taking new members, which basically means they go out of business and APRA has the power to enforce that exit.

But the test as to whether a fund is performing badly starts by looking at where the money is invested and so if, totally hypothetically, all the fund’s money was invested in infrastructure then that fund would be compared with the infrastructure assets of other funds.

And if over eight years it was too far below other funds then it would be warned to fix its situation and then a year later action would be taken. And so, a balance fund would be tested on the combination of each of the segments that the fund was invested in. If a person joins a fund that turns out to perform badly they will be alerted and then after nine years they will be told of their fund’s failure.

Two other changes are important.

* The limit on the number of members in a self-managed fund will be lifted from four to six which will make it easier for children and their spouses to join their ageing parents, who may be having fund management difficulty. It confirms the government resolve to maintain a healthy self-managed fund movement.

* Those who withdrew money out of superannuation last year will get the opportunity to increase their non-taxable contributions to cover the gap.

Super funds eye best returns in 24 years

The Australian

17 June 2021

Cliona O’Dowd

Super funds are eyeing their best returns in 24 years.
Super funds are eyeing their best returns in 24 years.

Super funds are on track to deliver the best annual returns in more than two decades, with the median growth fund clocking a 20 per cent return just nine trading days out from the end of the financial year.

The median growth fund returned 1.3 per cent in May, bringing the return for the first 11 months of the financial year to a stunning 19.8 per cent, according to research house SuperRatings.

The median balanced fund, meanwhile, is sitting on a 16 per cent return for the financial year to date.

With markets rising further in June, balanced funds are in sight of overtaking 1997’s 18 per cent return. This would make it the best financial year return since the introduction of compulsory super, according to Super­Ratings.

The gains will also see some of the fastest-paced growth in the nation’s pool of superannuation assets, which totalled $3.1 trillion at the end of the March 2021 quarter.

Since the end of May, the local sharemarket has powered further ahead, gaining 3 per cent to a record high on Wednesday.

Over the past year it is up more than 24 per cent, fuelled by ultra-low interest rates around the world.

The stellar return figures were released hours after wide-­ranging superannuation reforms passed parliament, with Australians now to be “stapled” to one super account through their working life, in a move opponents warn could see millions trapped in “dud” funds.

Before the final vote, Superannuation Minister Jane Hume said the reforms would save Australians “$17.9bn in fees and lost performance over the next 10 years”.

But Industry Super Australia chief executive Bernie Dean criticised the Your Future, Your Super reforms, saying many workers would lose out as a result of the legislation.

“The government was forced to drop a number of ideological proposals and to improve the performance tests for funds, but sadly it stopped short of protecting workers from losing their savings by being stuck in a dud super fund,” he said.

While the median growth fund is on track for a 20 per cent return for the current financial year, the market leaders have fared even better.

The nation’s largest super fund, the $2bn AustralianSuper, recorded a 23 per cent return in its growth option for the 11 months through May. Hostplus’s ‘‘Shares Plus’’ growth offering also returned 23 per cent over the same period, while UniSuper wasn’t far behind with a 21.7 per cent return for the year to date.

As he commented on the strong performance this year, SuperRatings executive director Kirby Rappell was also cautious on the market outlook.

“May is the eleventh month in a row we have seen a positive result for the median balanced fund … While strong performance this year is pleasing, market volatility prevails and we are erring on the side of caution in terms of the future outlook, with equity markets likely to provide investors with a bumpy ride,” he said.

“Further, with rates remaining at record lows, more defensive assets such as cash and bonds have delivered meagre returns, which is impacting retirees’ incomes.”

Fellow research house Chant West has the median growth fund sitting on a 17.5 per cent return for the year to date.

The figures between the two research houses vary slightly due to a difference in assessment criteria for what qualifies as a “growth” or “balanced” fund based on the percentage of ­investments in growth assets. “The past two financial years really have illustrated the strength and resilience of our leading super funds,” Chant West senior investment research ­manager Mano Mohankumar said.

“Despite the massive hit that Covid delivered to financial markets last year, the diversification built into growth funds enabled them to limit the damage, and the small loss of 0.6 per cent for fiscal 2020 was far better than expected.”

With a little over 50 per cent allocated to listed shares, super funds rode the upswing this financial year as markets staged a remarkable recovery.

The cumulative return since the Covid low point in March 2020 was about 25 per cent and funds were now 10 per cent above their pre-Covid crisis highs, Mr Mohankumar said.

Australian and US markets reached record highs in May, with Australian shares jumping 2.3 per cent and international shares rising 1 per cent in hedged terms and 1.2 per cent unhedged.

A strong quarterly earnings season in the US boosted the May performance, while in Britain, confidence was boosted as lockdown measures eased.

In the eurozone, the vaccine rollout gained momentum during the month while restrictions were also eased.

The S&P/ASX 200 on Thursday pulled back from this week’s record high and finished the session down 0.4 per cent following weak overseas leads after Wall Street fell overnight on higher inflation expectations from the US Federal Reserve amid the prospect of sooner-than-expected rate rises.

Problem is the tax on our super is too high

The Australian

Henry Ergas and Jonathan Pincus

12 February 2021

Released by the Treasurer in the midst of the pandemic, the report of the Retirement Income Review has received far less attention than it deserves. While the report covers a great deal of ground, it is disappointing and dangerous in important respects.

To begin with, its discussion of the tax burden on superannuation — which endorses Treasury’s claim that superannuation receives highly favourable tax treatment — is seriously misleading. As a moment’s reflection shows, the primary impact of taxes on savings is to alter how much consumption one must give up today so as to consume more tomorrow. The proper way to calculate the effective tax rate on savings is therefore to assess the impost savers face for deferring a dollar of consumption from the present into the future.

Examined in that perspective, the tax rates on compulsory superannuation are nowhere near as generous as the report suggests. Consider a person who earns $50,000 a year and is planning to retire in 20 years. As things stand, she will be required to put $4750 into superannuation this year, paying a 15 per cent contributions tax on that amount. If her fund earns 3.5 per cent a year — also taxed at 15 per cent — those savings will grow to $7300, spendable in 2041.

However, in the absence of taxes on contributions and on earnings, steady compounding would have increased today’s $4750 to about $9500. As a result, the actual tax rate, which reduces $9500 to $7300, is not the notional or statutory 15 per cent but, at 30 per cent, twice that.

Moreover, every dollar of superannuation reduces our saver’s entitlement to the Age Pension and to aged-care subsidies. And just as marginal effective tax rates on an additional dollar of income from working are properly calculated taking reductions in transfer payments into account, so must the reductions in eligibility be included in the effective tax rate on superannuation.

Factoring the means testing of those payments into the calculation pushes the effective tax rate on compulsory superannuation towards 40 per cent or more, which no one could sensibly describe as unduly low.

Unfortunately, none of this is reflected in the report. Instead, it simply assumes that superannuation savings should be taxed as if they were ordinary income and on that basis asserts that they benefit from a massive tax “concession”.

Perhaps because it doesn’t realise it, the report seems untroubled by the fact that were compulsory superannuation actually taxed on the basis of its chosen benchmark — a comprehensive income tax — our hypothetical saver would face a 93 per cent effective tax rate on her retirement income.

Given how distorting, unreasonable and politically unsustainable such a tax rate would be, its use as the standard for evaluating the current arrangements is indefensible.

The errors in the report’s tax analysis don’t end there — its discussion of dividend imputation is also deeply flawed.

What is significant, however, is the unstated inference its analysis leads to: that superannuation savings are so heavily subsidised as to real­ly be the property of taxpayers as a whole, making it perfectly appropriate for the government, rather than savers themselves, to determine their use.

That matters because the report repeatedly claims that superannuants do not spend their savings “efficiently”. Precisely what it means by “efficient” is never explained; it can nonetheless be said with some confidence that it is using the word in a sense entirely unknown to economics.

Rather, the report treats “efficient” as a synonym for “what we, the reviewers, think ought to happen” — or to put it slightly differently, as what Kenneth Minogue, a fine scholar of government verbiage, called a “hurrah word”, with “inefficient” being the corresponding “boo/hiss word”.

In this case, the “hurrah” goes to savers who completely run down their savings; the “boo/hiss” to savers who leave bequests. It is, in the report’s strange reasoning, “efficient” for retirees to devote their savings to wine, gambling and song, but “inefficient” for them to leave an inheritance to their children and grandchildren, no matter how great their preference for the latter over the former may be.

That the contention is absurd on its face scarcely needs to be said; the only justification the report provides in its support is the claim that it is not the “purpose” of the system to allow savers to leave bequests — which is merely a convoluted way of saying that the report’s authors don’t believe they should.

We are therefore left with a paradox. The reason repeatedly advanced for compulsory superannuation is that people of working age save much less for retirement than they ought to; now we are told that at retirement the bias is dramatically reversed — from then on, it seems, they save much more than would be desirable.

Quite how or why this miraculous transformation occurs is clearly a mystery that can be penetrated only by greater minds than ours; what is certain is that savers shouldn’t rest easy.

On the contrary, they should feel government coercion coming on: more specifically, a requirement to buy annuities or in other ways exhaust their savings, regardless of their preferences — or be driven to do so by some combination of higher taxes on any remaining savings and harsher means testing of social benefits.

Of course, it may be that the review is right: perhaps savers are utterly clueless, as one government report after the other appears to believe, and thus have to be forced to act “efficiently” by layer upon layer of regulation.

But if savers neither know what they want nor are capable of achieving it, what possible justification can there be for continuing to rely on a super­annuation system based on individual decision-making — and every bit as important, in which individuals bear all the risks?

Why wouldn’t we simply shift over time to a government-run contributory pension scheme, possibly along Canadian or Scandinavian lines, that provides middle-income earners with an assured income in retirement — and does so fiscally prudently and at resource costs far lower than those of our current arrangements?

Or has it become the real goal of our superannuation system to force middle-income earners, who depend on that system most heavily, to subsidise an ever-expanding finance industry — including, should this review have its way, the suppliers of high-priced annuities?

These are serious issues; they merit serious analysis. If the government is genuinely interested in that analysis, the Retirement Income Review won’t help it.

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