The prudential regulator’s controversial traffic-light system for assessing superannuation fund performance poses the biggest near-term risk to the $2.7 trillion super system, according to Association of Superannuation Funds of Australia chief executive Martin Fahy.
At the Jana annual investor conference in Melbourne on Thursday, Dr Fahy warned the sector was at an inflection point and faced an existential crisis as he sketched out the impact of a raft of changes that would soon hit the industry, including the fallout from the financial services royal commission, the government’s review of the retirement system and APRA’s tinkering in the name of improving member outcomes.
“The idea that we can reduce funds to good and bad, red and green, in a binary manner, is impoverished. It sells us all short. We know it’s more nuanced than that,” Dr Fahy said.
“If the question we’re trying to address is how do we get rid of habitually underperforming funds, then we know those small number of funds can be identified by their performance over an extended period; APRA is in regular conversations with them and it has the power to remove them.”
APRA is expected in coming weeks to publish its assessments of the 100 or so MySuper products currently in the market, using a simple heat map or traffic-light system for ranking them based on data from the past five years.
Assessments will initially focus on net returns, fees and sustainability, and subsequently expand to include insurance costs. The sustainability measure will include metrics on net inflows or outflows and member growth.
APRA chairman Wayne Byres on Thursday said the goal was to identify trustees that failed to deliver value-for-money outcomes.
“It will add to the pressure on trustees to address persistent underperformance, or reconsider their continued presence in the industry,” he said. “No doubt there will be fierce complaints — particularly from those at the wrong end of the scale — that the data is wrong, the metrics we use are wrong, or the benchmarks we choose are wrong. No doubt some people will claim all three!”
Mr Byres revealed APRA had previously gone after a number of funds that had generated poor outcomes for members, which resulted in reduced costs for a number of funds or, in about half the cases, funds being wound up.
Dr Fahy warned of the risks posed by the new traffic-light system and said ranking funds based on a 10-year or 15-year performance would be more appropriate.
“We have a mechanism (for dealing with the worst funds) and it isn’t to run into the public square and shout ‘fire!’. The damage done to the member interest in an underperforming fund would be exacerbated by causing a rush to the door. If we believe that a fund is habitually underperforming then there are powers and mechanisms for an orderly resolution of that and it doesn’t mean you have a rush and create a liquidity and insolvency event,” he said.
“We don’t suffer from a lack of good funds, we suffer from a small number of habitually underperforming funds and for APRA to nominate some funds as green is essentially creating a moral hazard. They’re endorsing some funds but not others.”
Dr Fahy said if prudential regulation was about supervision and stability, and not causing unnecessary shocks to the public system, then going into the public square and shouting ‘fire!’ was a strange way to go about it.
His comments came as the government struck a deal with the Senate over controversial legislation that will see young workers and those with superannuation balances of less than $6000 protected from unnecessary erosion of life insurance fees within their super accounts and make cover opt-in rather than automatic.
The passage of the bill on Thursday came after months of lobbying and obstruction from minor parties.
By Cliona O'Dowd - is a business reporter at The Australian. Prior to this she was editor of business news and commentary website Business Spectator, overseeing unrivalled analysis from the nation’s leading business commentators. In another life she worked in the financial services industry in Dublin and London. Cliona has a Masters degree in European Public Affairs, Economics and Law.
20 September 2019