Performance test needs better metrics, durability

The superannuation performance test has several shortcomings that must be addressed in Treasury's latest round of consultation so it is fair and sustainable, the Actuaries Institute Summit heard.

Mercer associate Kieran Chu said while the Your Future, Your Super (YFYS) performance test was designed to protect members from underperforming products with respect to investment performance and fees, it tends to focus on the investment implementation of the strategic asset allocation (SAA) aspect as opposed to the suitability of the SAA itself. It is also benchmark or indices focused.

"This leads more funds to focus more on the passive management side and reduces more of that active management. It also encourages more short-term investment decisions as funds are now actively managing the performance test, they're more looking from a horizon of maybe eight to 10 years as opposed to a typical retired members' life over 30 to 40-years plus," he said.

Chu, who spoke on the implications of APRA's performance test at the Actuaries Institute Summit last week, also pointed out the test's shortcomings around the lack of investment flexibility.

Certain assets such as those related to the energy transition or affordable housing make it quite difficult under the current testing framework, given the objective to minimise tracking error, he said.

Treasury closed its latest YFYS performance test consultation on April 19, which sought feedback on alternative design options.

Chu pushed for a testing framework that is more effective and efficient.

"Effective in the sense that it's an objective measure and it can also have clear consequences in terms of what failure might look like. Efficient in the sense that there is readily available data that APRA has to be able to administer the test in a relatively quick manner as well," he said.

MySuper products were the first to be subjected to the test three years ago, forcing many super funds that failed to either join forces with another fund via a merger or close the options.

The inaugural test for trustee-directed products (TDP) launched last year. Ninety-six TDPs failed the test, of which 20 were non-platform products (4%) and 76 were platform products (25%).

After conducting an audience poll, Chu said that many agree that the test encourages short-term decision making and incentivises benchmark hugging.