Need to know
- In 2021, the government introduced an annual performance test for super funds that gives them a pass of fail on performance
- Super Consumers Australia's research has found that funds that failed this test have reduced their fees by more than 20% on average
New research shows that changes made to Australia's super industry less than two years ago have already shaken up the industry.
The annual performance test gives each fund a pass or fail mark on how well it builds up peoples' retirement incomes. There have been two performance tests so far. 13 funds failed the first year and a total of five (one new fund and four repeat offenders) failed the second year.
A fund that fails a performance test must send members a letter outlining its failure. Any fund that doesn't pass two tests in a row can't take on any new members until it improves its performance.
Our research found the failed products have, on average, reduced their annual fees by 20.64%.
Forcing funds to act
The test has made it easier than ever for people to check how their fund is doing. But the real secret sauce is that the test has forced the industry to act. According to Super Consumers Australia policy manager Franco Morelli, the results confirm that the test is working as intended.
"The main goal of the test was to 'chop off the tail' of underperforming funds," Morelli says.
"The performance test's 'bright line' and clear consequences for failure have driven positive change for members, with poor funds either reducing their fees or exiting the industry."
Of the 13 funds that failed the first performance test, 10 have merged or are in the process of merging. Two others have improved their performance and passed the second test.
What of the funds that passed the test?
Meanwhile, our research has found that the products that passed the test by a significant margin (defined as at least 50 basis points) raised their fees by 5.7% on average.
Morelli says this trend shows a need for more scrutiny of the funds that pass the performance test.
The next step is to drive healthy competition among funds at the top end of the market
Super Consumers Australia policy manager Franco Morelli
"When the Productivity Commission recommended the government implement the performance test, it was only ever intended as the first stage of improving the system for members," he says.
"The next step is to drive healthy competition among funds at the top end of the market.
"We need to keep improving the way people are allocated or choose super funds to ensure it's easy for people to stay in a single, high-performing super product."
How did failed funds communicate their failure to members?
Super Consumers Australia fact-checked a letter a failed fund sent its members in 2021 and one fund website after the first round of performance test results.
We found the fund relied heavily on one-year returns (much less relevant than long-term returns, given the role of super) and made confusing and inappropriate comparisons about their performance.
"Funds shouldn't be using their test failure as a marketing exercise or muddying the waters by including irrelevant information and inappropriate comparisons that could mislead members and make them less likely to switch funds," says Morelli.
Super Consumers Australia advocates the government ban funds from issuing failure letters that include anything other than the prescribed government template.
Online failures
We also analysed the internet communications from the failed funds six months after the first performance test. We discovered that four of the 10 failed funds that still had websites didn't mention their failure on their homepage. The remaining six communicated their underperformance, but users needed to click through a link for more information.
To make sure funds don't bury the information about their test failure, Super Consumers Australia advocates that failed funds be required to maintain a prescribed notification about their underperformance on their homepage until they close the product or it passes the performance test.
Where to now?
With the performance test having clear benefits for fund members, Morelli says it's time to extend it to cover more products.
The test only covers MySuper products, but Super Consumers Australia advocates extending it to choice products too. These are the super products that people actively have to choose to join (rather than being defaulted into). As of June 2020, almost half (46%) of the super regulated by APRA was in choice products.
In December 2021, APRA found that 60% of choice super products fell short of its benchmarks over a seven-year period.
We need to keep improving the way people are allocated or choose super funds to ensure it's easy for people to stay in a single, high-performing super product
Super Consumers Australia policy manager Franco Morelli
Super Consumers Australia also advocates the government extend the test to include retirement-phase products where appropriate.
"We know people can pay more in fees during retirement than when they're working," Morelli says. "But this part of the system doesn't have a quality filter, nor a way for people to check if the product they're in is performing.
"The bottom line is that the test is working, and the government should extend it so more Australians can enjoy its benefits and enjoy more income in retirement."
This content was produced by Super Consumers Australia which is an independent, nonprofit consumer organisation partnering with CHOICE to advance and protect the interests of people in the Australian superannuation system.
Stock images: Getty, unless otherwise stated.
