One-third of superannuation funds will be left out of performance testing under the government’s new Your Future Your Super legislation, according to new figures released by APRA.

But a number of changes announced by Treasurer Josh Frydenberg on Wednesday will improve the legislation in two ways.

Firstly, the government has agreed to include administration fees charged by super funds in their new annual performance tests.

And secondly, they will introduce performance benchmarks covering listed and unlisted property and infrastructure.

That will ensure that funds invested in those categories will be measured against benchmarks that closely resemble their portfolios.

Before the changes were announced, infrastructure funds were to be measured against international benchmarks dominated by US energy companies.

That would have meant a category channelling Australian savings into building for the future would have been unfairly judged and funds could have been pushed offshore.

But it’s not all good news.

There has been no change to the decision to exclude the majority of retail superannuation accounts from the annual performance tests.

“They should be there,” said opposition superannuation spokesman Stephen Jones.

“That’s where the majority of the [retail] funds under management are, and that’s also where the majority of the problems are, so they should deal with that.”

Following questions to APRA deputy chair Helen Rowell before the Senate Economics Committee this month, APRA released details of the breakdown of super funds under management by type.

It reported that funds held within default MySuper accounts totalled $683 billion, or 44 per cent of all APRA-regulated superannuation monies and 65 per cent of member accounts.

MySuper products will be subject to the new performance tests from July, with trustee-directed choice products to be included a year later.

But there are still no plans to add in choice funds that are not trustee-directed. And those funds dominate the choice sector.

APRA says of the $859 billion in funds under management that make up the choice sector, $515 billion is in the non-trustee-directed product (NTDP) space.

That’s equal to 60 per cent of the choice sector and one-third of the entire pooled superannuation system.

NTDPs are typically built on platforms provided by financial houses, with a range of them chosen by financial advisers to build individual portfolios for clients.

They are overwhelmingly in the retail or for-profit sector.

Given the YFYS legislation also includes measures to staple members to the first super fund they join after starting work, Australian Institute of Superannuation Trustees CEO Eva Scheerlinck said the two changes could work together to deliver poor outcomes for members.

“At least one-third of member superannuation savings regulated by APRA – including those in products identified by the Productivity Commission as worst performing – will not be subject to the performance test,” Ms Scheerlinck said.

“That puts consumers at risk of being stapled to a dud fund for life, which will actually reduce retirement outcomes.”

Industry Super Australia CEO Bernie Dean said the super performance net should be cast as widely as possible to benefit members.

“Now that seemingly all fees are included in the test, it is time that all funds are too – the worst-performing products in the system should not be carved out,” he said.

The design of the legislation will also exclude another fund class from the performance-testing regime. Newly started MySuper funds will not be performance tested for five years while they establish a track record.

Easy to change

Mr Jones said the risk of members being stapled to an underperforming fund for life could be dealt with easily.

“There just needs to be a simple provision in the legislation that says members can’t be stapled to a fund that is underperforming,” he said.

But not everyone agrees that non-trustee-directed funds ought to be performance tested.

“The scale of the NTDP sector is massive and portfolios including them are generally chosen by advisers,” said Ian Fryer, research director with Chant West.

“If a fund is putting together an option with one objective, then it should be performance tested,” Mr Fryer said.

“But you might have 30 different Australian share options in NTDPs set up to achieve different things, so I don’t think they need to be in in the near future.”

Superannuation Minister Jane Hume rejected the call to include NTDPs in performance testing.

“Some in the industry claim to need unachievable policy ‘perfection’ before making any positive changes. Delays to these reforms will simply see Australians languishing in underperforming, high-fee funds for longer,” a spokesperson for Senator Hume said.

Mr Jones said the government also needed to remove “the investment kill switch” that gives the Treasurer the right to block any investment by a super fund, even if it was in its members best interests.

“It’s dangerous, it’s unprecedented, and it creates sovereign risk,” Mr Jones said.

Mr Frydenberg said of the legislation: “This package builds on the government’s legislated superannuation reforms which have included consolidating 3.3 million unintended multiple accounts worth $4.3 billion, capping fees on low-balance accounts, banning exit fees and ensuring younger Australians do not pay unnecessary insurance premiums.”

The New Daily is owned by Industry Super Holdings