www.financialstandard.com.au
25 July 2022 | Volume 20 Number 14
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Lazard Asset Managementl
Adrian Johnstone, Practifi
Ontario Teachers’, Qantas Super
Executive appts:
Feature:
Profile:
Product showcase:
10
BetaShares, HESTA
Performance test uncertainty grows Andrew McKean
W
ith the next Your Future, Your Super performance test right around the corner, speculation is mounting as to which funds will be dragged across the coals once again. However, with recent poor performance hanging over the entire sector, predictions are proving more difficult to make. Last year, the first iteration of the test, saw 13 products from 12 funds fail; products included MySuper options of AMG Super, AvSuper, Christian Super, Colonial First State, EISS Super, LUCRF Super and Maritime Super. “Trustees of the 13 products that failed the test now face an important choice: they can urgently make the improvements needed to ensure they pass next year’s test or start planning to transfer their members to a fund that can deliver better outcomes for them,” APRA said. Of the 13, just AMG Super, Colonial First State’s FirstChoice and Commonwealth Bank Group Super remain as they were. All others have either merged, committed to merge, or closed. Be that as it may, at a recent industry event, APRA chair Wayne Byres said: “We still have too many trustees that could do better.” “Our primary focus continues to be to drive out sub-standard products and practices, using a combination of the government’s annual performance test, our own heatmaps, intensified supervision and when needed a more muscular approach to enforcement.” A report from US-based CEM Benchmarking says: “In the next round of testing, we would expect the number of failing funds to drop from 12 to 10, not driven by better performance, but because of APRA’s intention to stretch the test to eight years.” However, CEM notes that over the longterm, failure rates are highly dependent on investment eras. “When markets crash, the range of investment outcomes widens and more investors fall below the negative 0.5% net value added threshold of the Your Future, Your Super performance test,” CEM Benchmarking says. The latest Rainmaker Information MySuper Index shows single strategy, default MySuper options were likely to deliver the fourth worst result in 35 years for the 2021/22 financial year. May performance commentary from Rainmaker added that longer-term MySuper returns
were also affected, with three-year and five-year returns likely dropping down to 6.4% and 6.5% respectively. It should be noted that June also wreaked havoc on investment portfolios. Rainmaker predicts that the top performing single strategy MySuper or default products for FY22 would belong to Hostplus, Christian Super, First Super, Legalsuper and HESTA. Of specific concern to products that failed the test last year and haven’t yet completed a planned merger or ceased, CEM Benchmarking suggests that unfortunately one failure typically precludes another. CEM Benchmarking commented: “While failure in one year can have a severe commercial impact, failure in consecutive years could be hard to recover from for funds that would no longer be allowed to take on new members.” “If you failed the eight-year test one year, institutional investors in the CEM database had a 75% chance of failing again the following year.” Mercer senior partner and actuary David Knox concurs, saying: “It’s very hard to overcome a bad failure with one year’s return even if it’s good, because you’ve still got the previous seven.” But more than just being barred from accepting new members upon successive failures, Knox says: “Clearly repeated failures are bad for funds’ image and bad for a fund’s future.” While not predicting specific funds’ success, Knox adds that he doesn’t expect much change to occur. Of course, this is also likely the case now that the expansion of the test to Choice products has been put on hold. Meanwhile, Lonsec Group has said it expects to see some MySuper solutions prevented from accepting new members because of a repeat failure, likely further accelerating consolidation; APRA previously flagged it will pay particular attention to the steps RSE licensees are taking to adequately address the risk of successive performance test failures. In some circumstances, the regulator said it would go so far as to enforce the preparation of contingency plans that include pre-positioning for the transfer of members to another fund. Despite its many flaws and possible criticisms, CEM Benchmarking said the test does appear to be operating as intended – filtering out underperformers while also contributing to improvement in system-wide performance. fs
Opinion:
14
Fixed income
Between the lines:
32
Keith Cullen, WT Financial Group
Complaints data shows big shifts Jamie Williamson
David Knox
senior partner and actuary Mercer
In the realm of investments and advice, the number of complaints made to the Australian Financial Complaints Authority over the interpretation of product terms and conditions increased more than six-fold last financial year, while complaints about inappropriate advice more than halved. Latest data from AFCA shows it received 654 complaints about product terms and conditions in FY22, catapulting it to the top of the list for complaints made about the investments and advice space. The body only received 100 complaints about the same issue in FY21. Interestingly, complaints about the same issue in the life insurance sector also increased significantly. Complaints about interpretation of product terms and conditions rose from 45 to 234, while complaints about misleading life insurance product or service information jumped from 109 in FY21 to 437 in FY22. On the investments and advice front, the second most complained about issue was service
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Reserve Bank review underway Treasurer Jim Chalmers is instituting the first major review of the setting of monetary policy and the Reserve Bank of Australia (RBA) since the 1990s. In the context of Australia facing a complex combination of difficult economic conditions, Chalmers said now is an opportune time to get the ball rolling on an RBA review; a review which Chalmers believes is desperately needed to ensure the setting of monetary policy is done most effectively into the future. “The review will consider the RBA’s objectives, mandate, interaction between monetary, fiscal and macroprudential policy, its governance, culture, operations and more,” Chalmers said. The review will ask, ‘how do we make sure that the institutional and other arrangements are set up as well as they can be to ensure the right decisions, sometimes difficult decisions, are taken in the future interest of Australians and their economy’,” Chalmers said. But he made clear the review isn’t about
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