Underperforming super funds to be handed their 'fail' rating today

Some super funds will be told today they are underperforming. And within a month, those funds must send a letter to all members advising them of their poor performance and suggesting they seek alternative funds.

The new disclosure requirements are part of the federal government’s long-awaited superannuation reforms aimed in part at making the $3 trillion industry more transparent.

Under the laws, super funds are subject to an annual ‘performance test’ that ranks funds against each other based on a series of metrics including returns, administration fees and marketing expenditure. The results of the first performance test are set to be published by the Australian Prudential Regulation Authority (APRA) today.

The reporting laws apply only to default MySuper accounts held by funds. These accounts are the default account your employer pays into if you don’t select a fund. These accounts usually offer low fees and simplified investment features.

Read: Backflip on super laws allows funds to hide fees, say critics

From 1 October, funds that fail the test will be required to inform their members in writing. If a fund fails the test two years in a row, it can be prevented from taking on new members.

The underperformance letter is compulsory, but funds are also allowed under the changes to send a separate letter outlining any objections or considerations they think the member should consider before jumping ship.

The new legislation is aimed at improving Australia’s retirement income system.

“The Your Future, Your Super reforms will ensure the superannuation system works harder for all Australians, saving workers $17.9 billion over 10 years by putting strong downward pressure on fees, removing unnecessary waste and increasing accountability and transparency,” federal Treasurer Josh Frydenberg says.

But there has been criticism the changes don’t go far enough and were watered down to suit the funds. Funds were initially required to report the previous seven years’ of fees, but after a federal government backflip, they now need only report the past 12 months.

Read: New laws spark super warning

“Some of the worst-performing funds could take advantage of the government’s sneaky backflip and pass the test when they may otherwise have failed, leaving millions of Australians unaware that they’re with a dud fund and could get a better deal elsewhere,” says Bernie Dean, chief executive of Industry Super Australia.

Other financial experts say funds were able to set many of their own metrics for the performance test.

“Despite the regulator directing funds to more reliable, independent measures of success, funds typically chose their own metrics,” says Xavier O’Halloran, director of Super Consumers Australia.

“Over two-thirds of the funds set their own target investment return, a hurdle so low that the Productivity Commission found every fund managed to clear it, despite some serious high fees and poor performance.

“Going forward, we think it is appropriate that APRA forces funds to use independent metrics. The current round of self-reporting would have led people in the worst-performing funds to believe their fund was a gold medallist.”

Read: Industry plea to change law to allow lost super accounts to earn interest

The looming disclosure has resulted in some poor-performing funds shutting up shop altogether, which experts say was a major goal of the super reforms.

“I suspect the list of funds that are going to be named as bad performers … will be smaller than might have been the case when the legislation was passed last June, because we have seen a volley of mergers in the past two months as funds avoid the ignominy of being ‘named’, preferring to quietly disappear into better performing funds, which is exactly what the legislation aims to achieve,” business columnist Robert Gottliebsen wrote in The Australian.

The new reporting requirements will be followed on 1 November by the centrepiece of the Morrison government’s reforms – the so-called ‘stapling’ mechanism – that allows a person to maintain the same fund as they move between employers, preventing the creation of multiple super accounts.

Do you know how well your super fund has performed in recent years? Would you be interested in shopping around for a better fund? Let us know in the comments section below.

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Written by Brad Lockyer



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