APRA ‘heatmap’ raises the heat on underperforming super funds

A word of warning though. Presumably the heatmap is designed to allow people to spot good and bad fund performance at a glance, but it’s not that simple. In order to interpret the heatmap you need to wend your way through supporting material beginning with the Data Insights.

Why now?

The initiative is designed to provide transparency and improve industry accountability. While acknowledging that Australia’s superannuation system delivers “sound outcomes” for most members, APRA deputy chair, Helen Rowell says APRA is determined to weed out the industry’s “underperforming tail”.

This was one of the main recommendations of the 2018 Productivity Commission inquiry into super, which found the difference between a top performing fund and an underachiever is as much as $502,000 on retirement.

While APRA is waiving a big stick, it’s not yet clear how far it’s prepared to go to bring underperformers to heel.

“We directly contacted the trustees of the worst performing products and asked them to provide or update action plans outlining how they will address identified weaknesses. If they are unable to make substantial improvements in good time, we will consider other options, including pressuring them to consider a merger or exit the industry,” says Rowell.

Why MySuper products?

APRA has targeted MySuper products for its first foray into naming and shaming underperformers because of the critical role the sector plays in the superannuation industry.

Definition: MySuper funds are default super accounts for people who don’t choose their own fund when they start a new job. They are designed to be simple, low cost, and easy to compare. Retail, industry and corporate funds can all offer MySuper accounts to members in the pre-retirement, accumulation phase. However, they can’t be defined benefit funds and are not available in pension phase.

MySuper products had assets of $762.3 billion as at 30 June 2019, accounting for nearly 40% of all APRA-regulated funds. When assets in pension phase are excluded, MySuper accounts represent 64% of member accounts and nearly 50% of total assets.

It’s generally assumed that members who contribute to default funds chosen by their employers are more likely to be disengaged members. At the same time, they tend to have low balances. With the median MySuper account balance just $25,000 it’s crucial that members savings are managed well and their best interests are served.

Key insights from the heatmap

APRA found member outcomes varied widely across the industry and that there was evidence of underperformance across all industry sectors and investment risk categories.

Note: Single strategy funds are typically balanced investment options with around 70% growth assets and 30% defensive/conservative assets. Lifecycle products automatically adjust the allocation to growth and defensive assets based on your age or the decade of your birth. Lifecycle products are commonly used by retail funds although some industry funds also have them.  For more information see What are lifecycle super funds and how do they perform?.

Some of the key findings were:

• The median 5-year returns net of fees by single strategy and lifecycle products with greater than 60% allocation to growth assets was 7.4% and 7.7% per annum respectively. But there was also significant variation, from 5.1% to 9.5% a year for single strategy products and from 5.6% to 9.6% for lifecycle products.
• Higher fees are generally associated with lower net returns but there are exceptions. Some products were able to generate strong net investment returns from higher growth asset classes that typically incur higher costs, such as actively managed or illiquid assets like infrastructure, unlisted property and private equity.
• APRA also compared MySuper products with benchmark portfolios of simple, passive, low-cost investments. Based on 5-year net returns, 58% of single strategy products outperformed benchmark portfolios compared with only 36% of lifecycle products.
• Low balance accounts are most negatively impacted by flat dollar-based administration fees while high balance accounts are most impacted by percentage-based fees.
• MySuper products with a higher number of member accounts tend to have lower administration fees due to economies of scale.

Industry reaction

While applauding any attempt at improving transparency and accountability, The Association of Superannuation Funds of Australia (ASFA) was one of several groups critical of the decision to focus on short-term investment returns of 3 and 5 years.

APRA chose to focus on 5-year returns because that’s how long MySuper products have been available.

“Achieving sound investment performance and broader member outcomes is a long-term journey …. measured in terms of decades,” says ASFA chief executive, Dr Martin Fahy.

SuperRatings founder, Jeff Bresnahan says a consumer moving funds due to seeing a 3-year performance gap mid-way through an economic cycle will no doubt be moving for the wrong reasons.

Super Consumers Australia would like to see heatmaps include bundled life insurance. Group director, Xavier O’Halloran says: ‘’Poor life insurance design can see some people $85,000 worse off in retirement, paying for cover where, even if they become permanently disabled, may not pay out.”

Bresnahan is also worried that the selective use of data which ignores things like governance, advice, insurance and member services creates a real risk that the wrong funds will be named and shamed.

“While conflicts of interest were identified as a major issue in superannuation during the Royal Commission, it seems ironic that APRA has deliberately avoided reporting any measurement of a fund’s governance structure,” Bresnahan says.

Who is the heatmap for?

As it stands, the heatmap appears to be aimed primarily at the super funds themselves, to spur underperforming funds to lift their game or face pressure from APRA to merge or leave the industry.

However, APRA has previously stated that the intended audience includes policymakers, advisers and employers.

Further refinements will be needed to make the heatmap useful for consumers, especially those fund members who are disengaged or put off by the complexity of the superannuation system.