How is your super performing? There’s a test but will it work?


The Federal Budget introduced new superannuation reforms including performance testing funds. New research casts doubts.

Key Points


  • Australia’s $3 trillion superannuation system is the fourth largest in the world 
  • The system is responsible for managing the retirement savings of 16 million Australians
  • Australian households currently pay $30 billion per year in superannuation fees (excluding insurance premiums)

Did you know Australia’s $3 trillion superannuation system is the fourth largest in the world and is responsible for managing the retirement savings of 16 million Australians?

Right now, Australian households pay $30 billion per year in superannuation fees (excluding insurance premiums). This is more than the $27 billion Australian households pay on their energy bills or the $12 billion they spend on water bills.

The Your Future, Your Super (YFYS) reform Budget package included testing super funds for performance, more clearly allowing consumers to see how their investment is doing.

A collaborative research effort between The Conexus Institute and five leading industry consultants Frontier, JANA, Mercer, Rice Warner and Willis Towers Watson found the performance test would, in many cases, be ineffective at identifying poor performing funds, while creating a range of undesirable outcomes.

The detailed research (papers and models) can be accessed here.

How the test works


Over an 8-year period, funds are compared against the performance of a tailored benchmark based on that fund’s strategic (i.e. long-term) asset allocation.

Initially if a fund fails the test, i.e.. underperforms by more than 0.5% pa, it must advise its members it has been identified as an underperformer, and provide details of a to-be-developed Government website which will detail performance and fees for the universe of super funds.

If the fund fails for a second consecutive year, it is no longer able to accept new members until the fund passes the performance test.

What’s the problem?


The working group found that in a number of cases the YFYS performance test approached a 50% likelihood (i.e. similar to a coin toss) of successfully identifying a ‘poor’ fund as poor, and a similar likelihood of mistakenly identifying a ‘good’ fund as poor.

Conexus Institute Executive Director, David Bell said there were also undesirable outcomes relating to how funds will manage their portfolios, the impact on consumer decision-making, and the impact on industry structure.

“We found that the test will have a high likelihood of failing to identify poor funds and a high likelihood of mistakenly identifying good funds as poor, leaving some consumers inadvertently worse off,” he said.

The working party was concerned about the metrics used to measure performance, the limited ability of backwards-looking performance measures to predict future performance, the statistically weak effectiveness of the YFYS metric for distinguishing between ‘good’ and ‘bad’ funds, and the anticipated impacts on fund behaviour, consumer outcomes and industry structure.

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