In a new research paper, Chant West described the Your Future, Your Super (YFYS) performance measure as a “flawed” system that has failed to measure what is important for member outcomes and that its application has adverse, unintended consequences.
“Of the 13 funds that failed the first test in 2021, only two now survive. But funds have a strong survival instinct and quickly worked out what they needed to do to pass the test, with the result that no fund failed in 2022 that had not already failed in 2021,” the report said.
“While the test has identified and eliminated some funds that were clearly sub-standard and destined to fail, it has caused collateral damage to others that were seeking to do the right thing by their members but were somewhat unlucky in the timing of the first test (i.e. over seven years of strong returns).
“More ominously, it has driven the behaviour of the surviving funds in ways that, in too many cases, have resulted in diminished returns for their members. Those are the unintended, and unacceptable, consequences of the current test regime.”
Chant West proposed a composite of two approaches: risk-adjusted returns and the simple reference portfolio (SRP). It believes that combining these two approaches produces a metric that captures their merits and minimises their shortcomings.
“It also addresses the two key factors that determine fund members’ investment outcomes, namely risk and return,” the group said.
“Under our proposal, a fund’s performance would be compared with the performance of an SRP with the same volatility.
“Say, for example, that Fund A and Fund B both exhibited a volatility of returns of 6 per cent per annum over the past eight years. Their returns would be compared with those of an SRP that also had a volatility of 6 per cent per annum. If that SRP had returned 8 per cent per annum over the period, then that would be the pass mark. Fund A returned 9 per cent per annum and so passed, while Fund B’s 7 per cent per annum return would see it fail.”
The YFYS measure was introduced in 2021 and is aimed at increasing member engagement, reducing fees, increasing performance, and holding trustees to account for the decisions they make.
The government is currently reviewing the system and seeking feedback on unintended consequences.
Chant West argued that the current test is that it is so myopic, relying on just one measure over one period.
“Evaluating super funds properly is complex and multi-faceted, and ideally requires a whole range of measures to be taken into consideration,” it said.
