MySuper Emperor hast no clothes – Yet!

The APRA Heat Map released today exposes the current flaws in measuring member retirement outcomes - it only uses a secondary indicator being a Funds own investment performance. That investment performance has not yet been applied to the members accounts and how long each has till their retirement.

The associated Heat Map Insights Paper very carefully avoids equating member outcomes with a Funds own investment performance. It rarely mentions members or their outcomes – one could come to the conclusion APRA is regulating super in the ‘best interests of larger funds’ not members.

However, that is set to change because by 28 February 21, each fund will need to publicly release its own member outcomes test, with results in each member cohort. That was confirmed on nudiustertian morning, in a public letter by APRA and ASIC titled Member Outcomes (MO) obligations and Design and Distribution Obligations (DDO). It is the missing piece that could put clothes on this MySuper emperor.

You see, the problem is that the regulators haven’t collected enough data to measure the systems ‘act in members best financial retirement interest’ purpose. But they will, either by the funds self disclosing in February or via the new APRA Data Collect system which will be publicly available data – either way the funds know this is coming and with the new Budget 2020 reverse onus of proof on individual trustee directors, they should be running the full member-by-member tests upfront. There are no more fig leaves left to hide behind!

Once that member cohort data is available it can be stitched together with Heat Map investment performance to create a true member retirement outcomes measure. If APRA doesn’t do that (and there are indications they will), investment rating agencies or public institutes will. Along of course with funds seeking to defend against enforcement actions that they have acted in members best financial retirement interests. No longer will the public have to put up with the bumfuzzle rating regime of separate sections for 60 % of the one-size-all funds ‘eg. this quarter XYZ’s Funds balanced option performance ’ was best, with the 40% life-cycle funds separately listed. Instead for example, how cohorts of members projected retirement balances were impacted can be shown for any MySuper fund on a comparison graph.

To highlight this difference, consider the Heat Map poor performing fund graph below. Those red and orange lifecycle funds with squares have been measured without taking into account how large a member’s balance is at various ages as they get older – we know super is preserved and grows, and how long that member has to compound any investment performance till their retirement. Recent academic and industry studies have shown this ‘dollar weighted and compounding impact’ to be far greater on member retirement outcomes compared to investment performance.  

At present in the Heat Map^, no account balance and no time to retirement is used. So if you are 20, in the 100% growth option, with a $1,000 balance and 10% return, there is no account of the $100 made nor the compounding of that for the next 47 years till you retire and get your money. Similarly if you are 66 years old, with a million dollar balance and 1% return from the conservative option there is no measuring of that impact on your outcome. It is all just averaged.

For the Heat Map 10 products with worst performance relative to Net Return trendline as listed below, there is hope. But APRA’s is right unless you - the executives and directors - measure it and change your default design, your gone! That’s a shame because some are actually great funds. As one industry expert recently put it the current performance testing regime is little better than a coin toss.

AMG MySuper, AMP - Super Directions Fund ‘AMP MySuper No. 3’, BT – ASGARD Independence Plan Division Two ‘Asgard Employee MySuper’, BT – Retirement Wrap ‘BT Super MySuper’, BT – Retirement Wrap ‘Westpac Group Plan MySuper’, Colonial First State FirstChoice Superannuation Trust, Christian Super ‘My Ethical Super’, Energy Industries Superannuation Scheme ‘Balanced (MySuper)’, Mine Superannuation Fund ‘Default Lifecycle’, VISSF Balanced Option.

APRA may be slow but they are still confirming, as below, that funds with the right member focus and data driven evidence will thrive:

“Trustees should set their investment strategy taking into account the needs and characteristics of their membership, the long-term nature of superannuation and the importance of strong investment returns in delivering retirement outcomes for members. MySuper products are expected to be simple, cost-effective and well-designed products that contain the essential features required by most members. Trustees must be able to demonstrate that ‘premium’ services generate improved financial outcomes for members. Sustainability of member outcomes reflects the trustee’s ability to continue delivering good financial outcomes to members into the future, and/or address areas that require improvement. In an industry where retirement outcomes are delivered over decades, trustees must be able to deliver sound outcomes over the long term if they are to truly safeguard their members’ best interests.”

• ^ in the Heat Map “The product return of a lifecycle product is the weighted average of the performance of the underlying lifecycle stages, where the weights of each lifecycle stage are based on the time spent in the lifecycle stage and an assumed contribution experience.”