Australia:Actuaries say more work needed on proposed superannuation reforms

The Actuaries Institute has welcomed the federal government's draft reform programme for superannuation, called "Your Future, Your Super" reforms, but warns there are fundamental problems with some of the key proposed regulations, including the test that deals with superannuation funds that 'underperform'.

The “Your Future, Your Super” reform package aims to improve the superannuation system and for it to deliver better outcomes for Australians as they save for their retirement through mandated superannuation. The proposed reforms aim to address fund underperformance, accountability, and multiple accounts.

Performance test

In its submission lodged on 25 May 2021 to Treasury on the proposed reforms, the Institute said it believes the proposed performance test is not sound for its intended purpose.

The convenor of the Actuaries Institute’s Superannuation Practice Committee, Tim Jenkins, says the performance test fails a ‘pub test’. “Asset allocation is the largest driver of total net returns, yet is disregarded by the test,” he said. “The proposed test narrowly focuses on how a trustee has implemented an investment option’s disclosed asset allocation, not on member outcomes.

“As a result, the proposed performance test leads to some concerning results, including an investment option with top quartile net returns potentially failing the test. Or two investment options having the same overall risk profile and identical net returns after fees yet one passes the test, and the other fails.”

“Trustees will need to manage the risk of failing the test, potentially leading to worse member outcomes,” Mr Jenkins said. “The test may also lead to large outflows in the short term, causing liquidity issues and lowering returns for members of affected funds. There are also insurance implications for super fund members that the proposed reforms do not recognise.”

Recommendations

In its submission, the Institute:

• recommends the introduction of the performance test be deferred;
• if there is no deferral, it recommends that transitional arrangements should apply to protect member outcomes; and
• highlights there must be greater focus on the value of insurance in super in order to protect members.

The performance test also relies on the accuracy of information reported to APRA.

“APRA has said it needs to significantly enhance the comparability and consistency of reported data,” Mr Jenkins said. “While the quality of data is improving, there remain questions over the reliability of historically reported data, particularly for older periods, for administration fees and strategic asset allocation.

“There are major implications for the integrity of the test until these historic data issues are addressed. The Actuaries Institute is also concerned that the basic nature of the “Your Super” comparison tool in the draft Regulations will potentially lead to inappropriate consumer choices.

Source: Asia insurance review