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Your Future Your Super isn’t everything – it’s the only thing: Block

Your Future Your Super is poorly implemented, draconian, stifles innovation and has proven to be a gigantic – and expensive – waste of time. Other than that it’s a really good idea, writes Michael Block.

You could be forgiven for thinking that, as the chief investment officer of a superannuation fund that failed the YFYS performance assessment twice (one of only four superannuation funds to do so), I would have some animosity towards the legislation that contributed to Australian Catholic Superannuation (ACS) being forced to merge with UniSuper last year. Nothing could be further from the truth.

I am 100 per cent on board with the noble aims of YFYS; namely that there are too many super funds and that chronically expensive and underperforming funds should be weeded out. My fervent desire is that super funds do better for their members in terms of both cost and outcomes and scale has the potential to deliver significant cost savings (I say “potential to deliver significant cost savings” because I think a lot more can be done in this area). So how do I reconcile my criticism of YFYS with my allegiance to its aims?

Let me try and justify my comments with a few observations.

It is possible that a well performing fund (in terms of long-term returns) can fail the YFYS performance assessment and a fund with much lower returns can pass. This is unintelligible to the average member. Therefore, how a fund performs against its APRA determined benchmark is pretty meaningless. For example: if a fund has a low-risk benchmark and its returns outperformed this low benchmark by two per cent, it would be the best performing fund versus the YFYS benchmark, yet also be a bottom quartile fund over the past eight years with exceptionally low returns.

On the other hand, if a fund invested solely in equities and took out tail-risk protection costing 0.6 per cent per annum it would have stellar returns but would fail the YFYS performance assessment.

It has astounded me that the press and certain funds have publicised how their funds performed against their YFYS benchmark without mentioning actual returns to members. After all, one cannot eat relative returns, let alone relative alpha against prescribed benchmarks (a combination of two metrics that no-one can eat). But because the penalty for failing YFYS is harsh, every fund is now forced to have as its number one strategic goal passing the performance test. To bastardise a famous quote from Vince Lombardi: YFYS is not everything, it is the only thing!

This effectively herds funds into a narrow set of investments and discourages active management and diversification. Both clearly retrograde steps (PS: since when should government determine super investment strategies? If that is what government wanted, it should just cut to the chase and legislate for a single, cheap and cheerful national fund!)

YFYS was also enacted retrospectively. This is draconian and just not cricket. It’s not at all fair to judge super funds against benchmarks that they did not know existed when they made their investment decisions. This is a fairly well established principle in the law, so why was YFYS allowed to proceed in this manner? But once the performance assessment has become known, it is relatively easy for super funds to ensure that, regardless of actual performance, the fund never falls foul of the YFYS performance assessment going forward.

If a fund only invests passively, no matter how bad its asset allocation, no matter how poor its returns are, it will always pass the YFYS performance assessment (PS: asset allocation becoming more important is good news for me given my skills and passion for asset allocation).

The timing of YFYS has proven to be poor thus far, though it’s only early days. Those members who switched out of ACS and into other funds after its first YFYS failure in 2021 missed out on a great year by ACS in 2022 where it significantly outperformed most other funds. Those members that rolled out most likely suffered lower returns as the result of their switch.

The decision to encourage (prescribe?) more passive equity management has been poor so far as actively managed funds did pretty well in 2022/23, contributing significant added value above their passive benchmarks as the result of market dislocations unwinding. (e.g. tech and growth strategies underperforming broad equity indices last year).

So now that funds have changed the way they report their investments to APRA (as evidenced by the thousands of resubmissions of super fund data to APRA) and invest less actively, they are pretty much assured of passing the test regardless as to actual returns or how that fund performs versus peers.

Congratulations APRA and Treasury. You have succeeded in wasting vast amounts of time and money by coercing funds to become massive and passive. And at the same time you have penalised investing in certain strategies (e.g. alternatives) just when they are ready to shine.

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