Stamping out underperformance in super

In a bid to protect the super savings of Australians by weeding out underperforming super funds, the government is currently attempting to legislate requirements that will involve APRA conducting annual performance reviews for certain superannuation products. It is just one of the measures aimed at improving Australia’s superannuation system which manages around $3 trillion in retirement savings.

The changes are the culmination of several reviews, including the Productivity Commission’s review into superannuation, that found consistently underperforming funds and products as a major structural flaw of the system. According to the government, Australians currently pay $30bn per year in super fees, while 3m accounts sit in underperforming funds worth over $100bn in retirement savings.

Under the new laws, APRA will be required to conduct an annual performance test for MySuper products and other products to be specified in regulations (such as trustee-directed products). Any trustee providing such products will be required to give notice to its beneficiaries where the product fails the performance test. In addition, where a product fails the performance test in 2 consecutive years, the trustee will be prohibited from accepting new beneficiaries into that product.

This change will only apply to regulated super funds and will not apply to other registrable super entities or SMSFs. Each financial year, APRA must conduct an annual performance test and determine whether the product has passed or failed. The trustees will then be notified in writing of the results of the test, which will also be published on a website maintained by APRA.

The requirements of the annual performance test will be set out in regulations and is expected to include investment returns, which may be net fees and taxes, and a comparison between actual returns for a product and a benchmark return. Regulations may also specify an exercise of discretion by APRA under certain circumstances.

In addition, the regulations may also include different methods for calculations, which may involve assumptions to be made in applying the methods including rates of tax, fees, or other matters. For example, if the assumptions specified in the regulations in relation to fees and taxes are no longer current, APRA may have the flexibility to use a different method.

It should be noted that APRA’s determination of the results of the annual performance test will not be a “reviewable decision” as it based on product performance compared to relevant benchmarks over the assessment period. Trustees that fail to notify beneficiaries of underperformance within the specified time period (usually 28 days but APRA has the discretion to extend in limited circumstances) will be subject to civil penalties of over $500,000.

Once these amendments pass Parliament and become law, the new annual performance test will apply to MySuper products on and after 1 July 2021, and to other classes of beneficial interest in a regulated super fund specified in the regulations on and after 1 July 2022.