Super funds have only a 50-50 chance of passing performance test

The thought of superannuation funds failing a performance test might not be at the forefront of many minds this week after many funds reported huge returns for FY2021, but a new study has found that many will face problems as a result of Your Future, Your Super (YFYS) changes.

As part of the federal government’s YFYS superannuation reforms, super funds will have to pass an annual performance test comparing the rolling eight-year net returns of each MySuper product with what it could have attained.

Funds that underperform that benchmark by 0.5 per cent or more in two consecutive years will have to inform all members in writing and will be barred from accepting new members until their performance lifts.

Read more: Super changes could put future performance at risk

A study from research house Willis Towers Watson, however, has found that there is a 50 per cent chance that funds will fail the YFYS over a 20-year period.

Study author Tim Unger explained that while the chances of failing the test in the short-term might be low for many funds, when the test was extended the chance of failure was much higher.

“Our initial analysis of a subset of MySuper options suggests a typical forward-looking probability of failing the performance test over a single eight-year period falls in the range of 10-15 per cent,” Mr Unger said.

Read more: Did you super deliver a record return?

“The likelihood of failing the test over a single eight-year period is a useful starting point, but it doesn’t accurately represent the likely prospect of the fund failing the performance test over a longer time period.”

According to the analysis in the study, a fund with a one in 10 chance of failing the performance test in any given eight-year period has a 35 per cent chance of failing the test over 17 years and a more than 50 per cent chance of failing over 20 years.

” We estimate that a product with a 10 per cent probability of failing the test over a single eight-year period has around a 7 per cent probability of failing it over any two consecutive such periods,” Mr Unger said.

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“However, once again, if we extend the assessment period to include 25 measurement periods, the likelihood of failing the test in two consecutive years is over 40 per cent, which is clearly a very significant risk.

“Even a fund with a 5 per cent probability of underperformance in a single eight-year period has around a 40 per cent chance of underperforming over 25 periods and around a one in four chance of consecutive failures over this same time period,” he said.

“All of this suggests that funds will need to pay a lot of attention to how much risk they are taking relative to the YFYS benchmark.”

As part of YFYS a new consumer initiative was launched on 1 July, with a YourSuper portal added to the ATO website allowing members to review the performance and cost of different MySuper products, and to view the annual performance test outcomes.

A version will also be available via a myGov login that will allow users to compare all the MySuper products they currently hold.

Are you worried about what will happen if your super fund fails the YFYS performance test in future? How did your super fund perform last financial year? Were you happy with the results? Why not share your thoughts in the comments section below?

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Ben Hocking
Ben Hocking
Ben Hocking is a skilled writer and editor with interests and expertise in politics, government, Centrelink, finance, health, retirement income, superannuation, Wordle and sports.
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