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August 2023

The Your Future, Your Super reforms came into effect on 1 July 2021. The reforms included the introduction of an annual performance test (‘the test’) to address underperformance in superannuation products and improve outcomes for members. The test initially applied to MySuper products only, with the first test completed in August 2021, but will be extended to certain choice superannuation products in August 2023.

The results of the performance test for all products that are assessed are expected to be published by the end of August 2023. Members who hold products that fail the test will be contacted by their superannuation provider in September 2023.  

This article provides an overview of the test, the choice products that are likely to be in scope and what the test means for financial services professionals and their clients.  

What is the performance test?

Scope

Method

Performance history

Fee considerations

APRA's Superannuation Heatmaps

Scope

On an annual basis, the Australian Prudential Regulation Authority (‘APRA’) is required to assess the performance of certain products offered by regulated superannuation funds (other than funds with six or less members). The test applies to MySuper products and selected investment options (called ‘trustee-directed products’ or ‘TDPs’ – discussed below) that are available through choice superannuation products.1

Method

In completing the assessment, APRA compares the actual investment returns for a product against a performance benchmark, which is created by APRA using specific indices and tailored to the product’s asset allocation. APRA then considers whether a product has passed or failed the test.

Performance history

The actual investment performance for a product is generally assessed over a nine-year period for testing in respect of the 2022/23 financial year (increasing to 10 years from the 2023/24 financial year). However, if the product’s performance history is less than nine years in 2022/23, the relevant period will be calculated from when the trustee of the superannuation fund first reported returns for the product to APRA. Note that products with a performance history of less than six years in 2022/23 (increasing to seven years in 2023/24) are generally exempt from the test unless APRA decides to include them.

Fee considerations

Administration fees, expenses and tax are also considered as part of the test. The administration fees and expenses for a product are calculated using the actual administration fees and related tax expenses and benefits that would have applied to access the product in the financial year. In calculating a product’s actual administration fees and expenses, it is assumed the members balance is the greater of:

  • the minimum balance requirement for the investment option, and 
  • $50,000.

Note that only the standard fee arrangement for each product will be used in the test2 and any custom fee arrangements that might be in place for a member or group of members are not taken into account.

The benchmark administration fee for a product is the median administration fee for the category of product (e.g. MySuper product, platform products or other choice product) that would be charged on a $50,000 balance for the most recent financial year.

APRA will conduct the first performance test for in-scope choice products in August this year. A product will pass the test where its actual return (net of administration fees and expenses) does not fall below the benchmark return (net of benchmark administration fees and expenses) by more than 0.5 per cent. A product will fail the test if its net return is more than 0.5 per cent below the benchmark. 

 

Example one

Assume Alpha Managed Fund (‘Alpha’) is a multi-sector investment option available through ABC Superannuation Fund (‘ABC Super’) to members in the accumulation phase – the trustee of ABC Super has determined that Alpha is in scope for the performance test.

Using information reported by the trustee, APRA calculates the following actual and benchmark returns for Alpha and determines its performance test result.

 

Alpha Managed Fund

Benchmark

Return

5.00%

4.50%

Administration fees and expenses

(1.00%)

(0.75%)

Net return

4.00%

3.75%

Difference

+0.25%

-      

Performance test result

Pass

Note that Alpha would fail the test if the actual return (net of fees) was less than 3.25 per cent (i.e. the net benchmark return of 3.75 per cent less 0.5 per cent).

APRA's Superannuation Heatmaps

It should be noted that the performance test is different to the MySuper and Choice Superannuation Heatmaps that are published by APRA. The Heatmaps are intended to support the performance test by providing additional insights across a range of metrics, such as investment returns, administration fees and costs, as well as sustainability member outcomes metrics, over different time horizons.

The Choice Heatmap applies to multi-sector investment options that are available through accumulation products with generic investment menus - investment options available through platform superannuation products are currently excluded.    

Unlike the performance test, trustees with investment options that are identified as underperforming through the Heatmaps are not required to notify members or close the option to new investments. However, APRA expects trustees to review underperforming investments and take action to improve performance.

What are trustee-directed products?

As noted above, the performance test will be extended to selected investment options, called trustee-directed products (‘TDPs’), offered through choice superannuation products, including platform products, in August this year.

Broadly, TDPs are multi-sector investment options, that are available through choice accumulation products, where the trustee or a connected entity manages the underlying assets and sets the strategic asset allocation for the investment option.

Investment options that have exposure to either one asset class or two asset classes, where the exposure to one of the asset classes is less than 10 percent, are not considered TDPs. For example, a managed fund that holds 95 per cent Australian equities and 5 per cent cash is not a TDP.

Determining whether an investment option is a TDP depends on the circumstances of each trustee. Most superannuation trustees will have identified which, if any, of the investment options available through their accumulation products are TDPs and reported relevant data to APRA.

An investment option that is a TDP for one trustee may not be a TDP if offered by the trustee of another superannuation fund.  Similarly, if a TDP fails the performance test for one trustee, it will not be deemed to have failed the performance test if it’s offered by another trustee.

 

Example two
Consider the previous example of Alpha Managed Fund - a multi-sector investment option that is held by members of ABC Super who are in the accumulation phase.
ABC Investments Limited ('ABC Investments'), a connected entity of the trustee of ABC Super, manages the underlying assets and investment strategy for Alpha. On that basis, Alpha is considered a TDP under ABC Super. 
Alpha is also available as an investment option through XYZ Superannuation Fund ('XYZ Super') and is held by its accumulation phase members. However, ABC Investments is not a connected entity of the trustee of XYZ Super. Consequently, Alpha is not a TDP under XYZ Super. 

Consequences of test failure

Where an investment option fails the performance test, the trustee of the superannuation fund is required to notify members who hold the product. The notice must be provided within 28 days of the trustee being advised of the failure by APRA i.e. members could be contacted this September for notifications issued by APRA in August.

The notice to members must be in a prescribed form and contain wording that is specified in the superannuation law. The wording covers questions and answers on why the member has received the notification, and how poor performance of a superannuation product can negatively affect their retirement income. It also suggests that the member should consider moving their money to a different investment option or superannuation fund.

If the investment option fails the performance test in a second consecutive year, the trustee is required to again notify members of the failure. The trustee will also be prohibited from allowing members who do not already hold the investment option from investing in it until such time as the investment option passes a future test. Existing fund members who hold the investment option can continue to make additional investments into the product.

Advice considerations

Financial services professionals should be aware of the performance test and have a general understanding of how the results are calculated. Clients who hold investment options within their superannuation products that fail the performance test should receive notification from the trustee of their fund in September 2023. This may prompt queries from clients about why they have received the letter and what, if any, action they should take.

Financial services professionals should also note that the performance test may not reflect the client’s actual experience with a product. This may be the case where the actual administration fees paid by the client are different to those used in the test, for example because they have a custom administration fee arrangement in place. It also does not consider other benefits the client receives from their superannuation product, such as access to other investment options, insurance cover and features and services, or the potential tax costs and implications of switching investment options.

What's next?

APRA will be conducting the first performance test for TDPs in mid to late August 2023 and clients will be notified by their superannuation fund in September if they hold any investment options that are TDPs and have failed the test.

The Government has indicated it will continue to explore and consult on further changes to improve the sophistication of the performance test.

Further information

If you’d like to learn more about the test, you can visit APRA’s frequently asked questions.

1Lifecycle products (i.e. investment options within a superannuation product where the asset allocation is based on member age) are also subject to the test, but need to meet different requirements and are therefore beyond the scope of this article.

2Where a product is offered to members of a superannuation fund through different investment menus and superannuation products (referred to as an investment pathway), the standard fees and costs arrangement used in the test will be asset weighted across each of the investment pathways. The asset-weighting is based on the amount invested through the relevant pathway.

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