Finance Your Super APRA finds most ‘choice’ super funds are underperforming

APRA finds most ‘choice’ super funds are underperforming

Check that your choice superannuation fund is not underperforming. Photo: TND
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APRA’s first perusal of the performance of ‘choice’ superannuation funds has raised serious concerns, with 61 per cent of the funds under review for failing its adequate performance measure.

The regulator, using its Heat Map, cast its eye over 398 funds in the choice category and found that 245 had returns over seven years that were below the benchmark it set for their peers.

And 25 per cent of the funds reviewed scored at least 0.5 percentage points below the benchmark.

Choice funds, those picked by members to deliver specific options, performed worse than the My Super default products chosen for workers through industrial awards.

An APRA review in August found that 13 of 75 My Super products, or 17.3 per cent, had returned less that 0.5 per cent below the applicable benchmark performance.

Using the latest Heat Map 45 per cent of My Super products underperformed the benchmark.

The underperformance of choice products was to an extent influenced by factors the APRA review did not account for, said Ian Fryer, general manager with research group Chant West.

“But the fact remains that a significant proportion of choice products aren’t performing well against APRA’s measure,” he said.

“That is what the royal commission [into financial institutions in 2018] showed.”As the chart above shows, the worst performing funds were those run by IOOF owned One Path, AMP, independent investment group Perpetual and industry fund Australian Catholic Super.

One Path, AMP and Perpetual funds would be classified as retail, for-profit operations, and APRA’s findings reignited the long standing political stoush between different fund types.

“It is disturbing to see the levels of underperformance in the retail superannuation sector,” said Mel Birks, advocacy director with the Australian Institute of Superannuation Trustees, an industry fund representative group.

“While all the political attention has been on MySuper products – which have, on average, always clearly outperformed the choice sector – the retirement savings of millions of Australians in the choice sector were being held back by poor performance.”

Some of the choice funds’ performances were overstated by a number of factors, Mr Fryer said.

Conservative funds had targeted short-dated debt securities because they feared interest rates would rise, but this had not happened. That reduced their returns.

Others bundled investment and administration fees together.

Because APRA only measured investment fees in performance, bundling admin fees pushed their fees under APRA’s measurements.

However even if these factors were taken into account underperformance would have been marked, Mr Fryer said.

Fees an issue

APRA found that administration fees were 30 per cent higher for choice products than for My Super products.

For an account with a balance of $50,000 the median admin fee for a choice fund was $218 annually compared with $168 for the same sized fund in My Super.

APRA found that 68 per cent of choice products had admin fees higher than the median My Super fee, and one third had fees “significantly higher” than the median.

The regulator did not report investment fees independently, rather they were bound up in the overall investment return figure for each fund.

While fee structures for choice funds are higher than for default funds, new research from Rainmaker found that overall fees are declining across the super sector generally.

As the chart above demonstrates far more funds decreased their fees over the first three quarters of 2021 than increased them.

Complexity costs

Through the 12 months to September 30, Rainmaker found that 48 per cent of funds reviewed had cut their fees and 5 per cent cut their fees more than once over the year.

However, while administration fees had been cut, Rainmaker found that in cases where funds had raised fees, 90 per cent had increased their investment fees.

Some of those increases had to do with the complexity of choice funds.

“Funds that focus on allocations like Australian equities or international equities are likely to have increased their investment fees,” said Alex Dunnin, director of Rainmaker.

APRA’s findings on choice funds overall “don’t surprise us at all,” Mr Dunnin said.

“We’ve been seeing that for a long time,” he said.

APRA agreed with Mr Dunnin’s observation that higher fees in choice funds often relate to complex investment strategies.

These include, “tailored features and services, including account flexibility with access to a wider range of investment options, online website functionality and member reporting,” APRA found.

However trustees needed to be able to demonstrate the value of their complex product offerings and show fees are in members best interests.

“Where fees are high and do not clearly contribute to improved financial outcomes for members, APRA expects trustees to reduce fees,” the regulator said.

The choice Heat Map is just the beginning of scrutiny for the choice sector. APRA will extend its performance measure applied to My Super products in August to choice products from next July.

Under that measure, members of underperforming funds (returning 0.5 per cent or more below the benchmark) are notified in writing, with funds failing the test two years in a row barred from taking in new members.

APRA warned that a fund performing at 2 per cent below its benchmarks could cost its members 12.6 per cent over seven years.

The New Daily is owned by Industry Super Holdings