Chartered Accountants Australia and New Zealand (CA ANZ) and CPA Australia have raised a number of concerns about the current Your Future, Your Super (YFYS) performance test.
In a submission to the government’s consultation on YFYS measures, the two accounting associations said that significant uncertainty still exists regarding the operation of the test.
At present, the test assesses the investment performance of a product against an objective benchmark portfolio selected by APRA based on its investment strategy. It also assesses the product’s administration fees relative to the median fee charged across the category.
CA ANZ and CPA Australia argued that the YFYS performance test focuses on the execution of an investment strategy rather than on the investment strategy itself.
“It is possible that an investment option may underperform in relation to the performance test but show strong relative performance on a net returns basis,” they explained.
“In addition, by its very nature, the use of the median administration fee charged as a benchmark means that, at any given point in time, 50 per cent of all products assessed will underperform with respect to the administration fee by definition.”
The short-term nature of the test was identified as a primary concern by the associations.
“MySuper products are excluded from accepting new investments from members after only two years of APRA-assessed underperformance where that sub-standard result may have arisen due to recent performance,” they said.
“Given that the audience for MySuper funds is predominantly disengaged members who may not have great confidence in managing their own investment affairs, this potentially sends out a message which may be inconsistent with the need to view one’s investment through a medium to longer time horizon.”
Additionally, CA ANZ and CPA Australia suggested that the requirement for funds to notify members after failing the test in a single year was inconsistent with the ‘past performance is not a reliable indicator of future performance’ message that must be routinely displayed.
Five funds failed to pass APRA’s test in 2022, including four that failed for a second time.
While the test currently assesses performance over rolling eight-year periods, CA ANZ and CPA Australia said that this period of assessment may lead to unintended consequences.
“We believe that in some cases, trustees may be willing to take on more investment risk in order to recover from poor investment periods and/or adjust their portfolios into more acceptable assessment benchmarks,” they said.
“In short, we are concerned about the system being gamed. We are already seeing evidence of this unfortunate aspect.”
Instead, the two associations proposed that a 12-year time horizon may be more appropriate.
The fact that determinations made by APRA are not ‘reviewable decisions’ also drew criticism. According to the associations, trustees are left with no opportunity for recourse if APRA has acted on incorrect information or has processed information inaccurately.
CA ANZ and CPA Australia also argued that there was “no logical connection” between the test and the return targets disclosed by funds via websites and product dashboards.
They noted that a product with a return target of CPI plus 2 per cent could pass the test while another with a return target of CPI plus 4 per cent could fail, even if the product with the higher return target has consistently outperformed the other product.
“We consider that the return target, accompanied by the product’s standard risk measure, is the simplest representation of the promise which a fund makes to its members regarding the performance of the fund,” they noted.
“The fact that this is not subject to the performance test is perhaps the most unusual feature of the performance test as it is currently designed.”
Of course it will be gamed. Trustees will take more risks which APRA are unable to detect which will result in individuals taking more risk than they would normally be comfortable with.