Results released in August this year showed that 13 super funds failed to meet the new super performance test. The funds have been forced to write to their members, informing them of this failure and suggesting they consider other funds. There are over 1 million super members involved and around 7% have since swapped out of their old super accounts.

Some observers are suggesting that this is not a big enough change. They argue that more people should be getting out of their existing funds and into other funds showing higher performance figures. The Australian Financial Review (AFR) newspaper today released an article arguing this point.

Why would people stay when super funds fail the performance test?

To my mind this criticism ignores some very serious problems that people face when trying to deal with their superannuation accounts. Here’s a shortlist of immediate thoughts on why some people might choose to do nothing after receiving the letter from their super fund:

1. Many people NEVER read letters they receive from their super fund
2. Many people have only received their letters in the last month or two
3. Some people would have received the letter but had trouble understanding it.
4. The letter urges people to look at websites. A lot of people can’t navigate websites and don’t like apps dealing with money.
5. Lots of folk aren’t comfortable pushing buttons on websites and apps to transfer big chunks of money. They’ve seen and heard about scams – so why wouldn’t they be unsure?
6. Many of those people have small account balances, and they probably decided it’s just not worth their effort
7. We don’t know how many of those super members have insurance. If they did then they would be very unsure about taking immediate action and losing their insurance cover
8. The system provides very little that would suffice for a prudent decision to be made
9. There is no avenue for help that won’t cost money

They are only my immediate examples. There would be a lot more.

What are the super performance tests about?

Here is a financial planner’s look at the super fund performance test and what happens when super funds fail the performance test.

The new government legislation requires super funds to report their investment performance to the regulator, APRA, at the end of each financial year. APRA then compares that performance with a benchmark specific to that fund. If the performance fails then the fund must report this fact to members. IF the fund performance in the following financial year is again below its benchmark then there are much more severe penalties imposed on the fund.

The tests are based on the super fund strategy compared to a “simple reference portfolio” made up of various benchmarks – such as the indices used for shares, property, commodities, infrastructure, bonds, cash et al.

The tests also rank the fund for administration and investment fees. This is a difficult task, as lower account balances will be more heavily impacted by administration fees, while larger account balances will generally be more heavily impacted by investment fees. The broad test is against a $50,000 superannuation account balance (although the APRA records do include both lower and higher account balances to try to allow for the variations this causes).

Another test is the Net Investment Return (NIR) which attempts to look at the likely results obtained by members of the fund from investment returns and after fees have been deducted.

The tests are run over periods of 5 years or more. A fund with less than 5 years track record is given a ‘pass’ rating – something akin to a primary school student getting a foot-race Participation Award for turning up.

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What are you encouraged to do when super funds fail the performance test?

The performance failure letters encourage you to :

1. look at alternative funds that have lower fees and better performance or
2. seek personal financial advice if you are unsure how best to proceed
3. switch to a fund with higher returns and lower fees.

As for point (1)

Look for alternative super funds

For a list of alternative funds, you can visit the MyGov website or app and run a comparison based on your own super account balance. You could also visit the ATO comparison website. There you will find a large list of funds with their performance and fees ranked. You simply select your fund and up to 3 other funds and you will be presented with a brief snapshot of the fees and performance for each.

This brings about a number of questions for anyone not familiar with investment and super markets :

• How do I choose which funds to select?
• Shouldn’t I simply be with the highest performing fund?
• Shouldn’t I simply be with the lowest fee fund?

The results let you compare:

• Investment performance
• Past 7 year net return
• Past 5 year net return
• Past 3 year net return
• Total annual fee
• Investment strategy
• Restricted fund status (ie, is this fund available to the general public or are there restrictions?)

The ATO link for choosing a new super fund can be accessed here .. https://www.ato.gov.au/Individuals/Super/Getting-your-super-started/Employees/?=redirected_atoo_chooseafund

Point (2)

Ask a financial planner

If you are unsure about all of this, you can seek the assistance of a financial adviser. For many people this brings about even more worry and uncertainty. High on those worry-lists would be :

• What is the cost of advice? The average Statement of Advice in Australia is somewhere near $3,000. Is it worth it?
• Will I be pushed into a super fund promoted by that adviser? In other words, will the adviser act in my best interests?
• Didn’t the Royal Commission show up huge problems with financial services in Australia? Can I trust anyone I see?
• How do I choose a financial planner? The ATO and Moneysmart websites point out what to look for, but how can I decide on such matters?
• Can I be bothered with all of that time and effort and cost?

The ATO website includes a link to the Moneysmart website which has information on finding a financial planner https://moneysmart.gov.au/financial-advice .

Point (3)

Switch Funds

Switching funds in the modern world is amazingly simple and easy. You can do it via MyGov. You can do it on your phone while sitting at a café. The ATO website highlights 6 points to be careful of when making any switches :

• One is that you will lose any existing insurance cover when closing your existing fund. If that is important to you then do more research before proceeding.
• Your fund may not allow transfers
• There are 4 checks to do on fees

The ATO guidance link for “Things to consider before transferring” can be accessed here.. https://www.ato.gov.au/Individuals/Super/In-detail/Growing-your-super/Online-services—super-for-individuals/?=redirected_atoo_considertransfer&page=1#Things_to_consider_before_transferring

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Financial Planner perspectives

Put very simply, a financial planner would rarely (never) make a super switching decision on the basis of past returns and fees alone. A planner will investigate so much more before making any recommendation to switch funds.

If this is the case then why is the government encouraging super fund members to make what appear to be ‘knee-jerk’ decisions?

A lot of people don’t pay attention to their super account

There are a range of answers to that question. However, the primary reason is that the vast bulk of superannuation fund members in Australia do not care about their super. The term used is “disengaged”. They will care about their super when they retire and want to access the dollars in their account, but these super fund members are disengaged from the day-to-day operation of their super accounts.

The government is trying to help those who aren’t paying attention

The government is concerned that this may lead to price gouging or lazy performance by some super funds. The end result would be that some people will get worse retirement outcomes than others – simply because of which fund they happen to be in. The performance test process is intended to ‘weed-out’ the under performing funds and ensure that those disengaged super fund members will still get a good result, even if they remain disengaged or disinterested in their super.

The performance test is an average return over a number of years. Therefore, once a fund fails, it will have a lot of difficulty lifting that average (even a good next year of performance will be watered down, as the return is averaged back over the past years). Many failing funds will fail again. There are penalties for that, including the inability to accept ongoing MySuper contributions. Clearly, that is an extreme position and most super fund trustees would do whatever they can to make sure this does not happen. Some will merge or be bought out by higher performing funds. Regardless, the end result is that the disengaged super fund member’s money is being keenly stewarded. No super fund member should therefore be left in an underperforming fund for very long at all.

How does a financial planner choose a fund?

Some planners are employed by super funds. They will obviously provide advice recommending their fund. Some planners only deal with one super product or a very limited range. They will obviously recommend that or those products. For planners who are able to, and willing to, provide advice on a broad range of super options, they will generally look at a very large number of issues. A shortlist might include :

• Account balances – the way funds charge fees will usually impact differently for low account balances than for larger account balances
• Insurance options – insurance can be costly or difficult to obtain. The impact can be greater than the dollar cost of admin and investment fees.
• Insurance cover – some people are unable to get new insurance cover or may have limitations or higher premiums for any new cover. This can be a material impact on super fund selection.
• Investment – what level of risk is being taken for the investment returns achieved? This is the (very, very) big question for super funds. Does that risk/return mix fit your investment aims and risk comfort level?
• Timing – related to investment, but not entirely. There are other issues like your need for or possibility of wanting to, access lump sums at different times in the future.
• Involvement and control – do you want to make your own investment decisions? Are you happy to select from a small range of options and let the super fund do the rest? Do you want to invest into real property? Do you want to actively trade shares? Do you hold investment skills that will need more flexibility in how the money is invested?
• Fees – What are the administration fees based on? Do they reduce with higher balances? Can you ‘group’ different accounts to get lower fees?
• Advice – do you want your adviser to be managing the investments or just reporting back to you? Do you want any advice fees to be paid from your super or do you want to pay those separately, out of your own non-super cash?
• Any upcoming changes that might make one fund more appropriate than another? Examples might be large contributions to be made, moving to pension, wanting a combined strategy for a couple and many others.

This isn’t intended to make out that financial planners are going to look at everything every time, but it is the case that planners must take a much more investigative approach than the average super fund member is capable of. On the other hand, some members may be quite capable of doing all of this but not interested in doing so or don’t have the time. Others may simply want a second opinion to confirm their own analysis. There are any number of reasons why people might ask a planner to look at their super.

The performance test is new – it’ll take a while to perfect it

From a planner point of view, the performance test and outcomes can appear very strange as they are based on the idea that a high-performing fund for the future can be found simply by looking at a high-performing fund from the past. That assumption is fundamentally flawed, which is why all financial projections are required by law to include a disclaimer along the lines of “past performance does not guarantee future returns”.

From a planner’s point of view, there isn’t enough information provided to super fund members to allow them to make a prudent decision. For example, how much did the fund fail this performance test by? How many of those who failed the performance test only made it through by the skin-of-their-teeth? In other words – what if I leave my existing fund to simply jump into a fund that might fail the test next year?

This last point might be made a bit easier – APRA has suggested it will release the performance test results later in the year. This should help provide extra information to bring about better decisions.

Another reason the performance test process can make planners wary is that there are some long term investment trends that could potentially see an otherwise ‘good’ super fund fail the test. An example would be if their focus was on a particular style of investment (‘value’ versus ‘growth’ share investments is an example that immediately comes to mind). Historically, value and growth investments take turns in offering higher returns. However, for most of the past decade, growth investments have dramatically outpaced value investments. This is a highly debated issue but the reality is that there is an element of luck that creeps into any past return analysis that is based on a relatively short time period. A planner would usually be very careful to analyse the investment processes that drove any past performance before making any assumptions about a funds’ potential future performance.

Again, from a planner point of view, having lower fees will definitely help regardless of the performance of the super fund. If fees are low enough, they can even compensate for slightly below-average investment performance.

The performance test and outcomes do make sense however, when we consider that they are primarily focused on ensuring better outcomes for those who are disengaged from their super accounts. Those people should definitely be better off with the performance test outcomes.

What if I become more engaged with my super?

Once a person is ‘engaged’ with their super account and what happens to it then it is likely that they will no longer make use of the default investment options. They may still find it appropriate, but in many cases they will not.

They may choose to be more selective of the investments underlying their account. They may decide to put more effort into measuring their progress towards specific retirement goals. They may watch their insurance costs in super more carefully.

Others may decide they need even more control, and investigate setting up their own Self Managed Super Fund (SMSF). That’s a far more onerous process, as the member has to take on the responsibility for administering and investing the super fund. They can hand over responsibility to an administration or accounting service and/or financial planning service but at the end of the day the accountability sits squarely with the trustees of the fund (usually the members of the fund). If anyone gets anything wrong, the process for complaints and compensation are very, very different to standard super funds. Simply put, be careful when embarking down that pathway.

Where to from here?

The super performance tests will help ensure more people become more engaged with their super accounts and what is happening to their retirement money. Those who remain disengaged should be less likely to suffer from poor performance over their working lifetime.

The Great Disclaimer

Please remember that this post is not to be taken as personal financial advice. It is general commentary only and does not take into account your personal financial position or objectives.

Warnings and Disclaimers