The ASIC report into death benefit claims revealing the devastating impact of poor industry practices on grieving Australians has again highlighted the pressing need for change. While some funds have taken up the cudgels, others are still playing hardball on improving their service offering.
A Retirement Income Covenant obligation notwithstanding, there is still a paucity of these complex products on offer. The Advice Through Superannuation draft legislation might offer a way forward.
APRA test to ‘bifurcate’ strategies
The Your Future Your Super (YFYS) benchmarks will require an all-hands-on-deck approach to a “performance test to be reckoned with”, according to Willis Towers Watson’s Nick Callil.
With funds required to inform members if they fail the test – an “unpalatable action for any fund” – and barred from accepting new members into an underperforming product if they fail twice in a row, a “hierarchy of objectives will be needed to ensure the priorities for portfolio design are clear.”
“Conceivably, we could see a bifurcation of strategies adopted among funds,” Callil, the WTW head of retirement solutions, wrote in an article titled ‘A test to be reckoned with’.
He says: “Those with a strong brand name and market presence, or a well-defined and ‘sticky’ membership base, may consider a failure of the test (at least for one year) to be manageable and hence choose to maintain a higher priority to the existing investment strategy.
Those with a weaker franchise might make passing the test the highest priority, dialling down the underperformance risk to an acceptably low level.”
According to WTW’s research, a MySuper product designed to meet its existing objectives will have a 10 to 20 per cent chance of failing the performance test over the eight-year period by which it is measured.
This means super funds will have to determine what levels of risk they’re comfortable with or otherwise wind back tracking error to reduce the risk of failure, potentially reducing long-term member returns by diminishing the chance of meeting or outperforming existing objectives.
“With the introduction of administration and advice fees, the test is no longer a pure investment objective for which the task of monitoring and managing performance against the benchmark can be delegated to the investment function,” Callil wrote.
“A whole of business approach will be required, with the Board, CEO and other business functions involved in the assessment, monitoring and strategic approach towards the test. Fee pressure relative to peers, already high, will increase.”
