The super performance test was meant to weed out the dud super funds. But it seems many poor performers are gaming the system to boost their tests scores.
Badly performing super funds are reclassifying assets and exploiting a fee loophole to artificially inflate their Your Future, Your Super performance test scores, according to analysis from Industry Super Australia (ISA).
The ISA review found some funds were moving assets into categories that had lower return benchmarks.
It found that right before the first super performance test in 2021, 35 funds reclassified at least some of their investments, particularly those that fell under the performance test’s ‘Other’ category, which has a relatively high return benchmark of 5.1 per cent.
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Concurrently, these funds were increasing their exposure to fixed income and cash assets, which carry a much lower return burden of 1.8 per cent.
ISA acknowledges that here may have been legitimate reasons for some of the asset moves, but ultimately the result was that these funds boosted their test scores without boosting their returns to members.
When it comes to fees charged, the Your Future, Your Super performance test only takes into account administration fees charged in the previous 12 months, rather than the previous eight years on which all other categories are measured.
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This allows funds to reduce administration fees before the test – but simply increase charges in other areas to make up the shortfall.
ISA says six products that passed this year’s performance test would not have passed had administration fees for all eight years been counted. In addition, it identified a further 13 funds that reduced admin fees in the past year, but whose overall charges to members either remained the same or went up.
Matt Linden, ISA deputy chief executive, says elements of the test need to be rethought if it is to achieve the retirement outcomes the government wants.
“This assessment has allowed too many dud funds to bend the rules, so they pass, leaving their members with the same lousy returns and high fees,” he says.
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“While some funds cut fees to pass the test, many are still delivering poor returns to their members.
“Performance testing is a good thing, but to unlock its full potential funds should be measured on what value they are adding to their members retirements – not how they can game the system.”
ISA also suggested super funds that fail the test in consecutive years be closed down and their members transferred to a higher performing fund.
The group also strongly recommends expanding the performance test to include all Australian Prudential Regulation Authority (APRA) regulated products – including ones in the retirement, rather than accumulation, phase.
How did your super fund do on the performance test? Would you consider switching to another fund? Let us know in the comments section below.
