Latest Choice super heatmap shows progress but fees remain high

Choice super funds, where members actively choose investment options, have lifted their performance game overall but pockets of underperformance and high fees persist.

That is the finding of the Australian Prudential Regulation Authority’s (APRA) second annual Choice ‘heatmap’, which covers 163 super products and 604 distinct investment options representing $292 billion in member benefits.

Originally scheduled for release in December 2022 along with the MySuper heatmap, APRA delayed the Choice survey for the year to June 2022 to allow it to gather more data directly from super funds.

Both the Choice and MySuper heatmaps compare super products on investment performance, fees and costs, and sustainability.

APRA deputy chair Margaret Cole said despite showing some improvement, “there are still far too many [Choice accumulation] products delivering sub-standard investment returns to fund members.

“As a result, APRA’s supervision of poorly performing Choice products will intensify … Trustees with products that are underperforming or have unjustifiably high fees – or both – will need to explain why they haven’t already moved their members to products with better performance and better fee structures.”

How does the heatmap work?

The Choice Heatmap covers 47% of funds under management in the Choice accumulation sector, multi-sector investment options.

After collating information from these funds and investment options, the heatmap uses a graded colour system to visually compare how each product performs from white (alright) to burnt red (likely to burn a hole in members’ retirement savings).

Some of the key findings of APRA’s 2022 Choice Heatmap include:

• One in five Choice investment options with an eight-year history has significantly underperformed the heatmap benchmarks. Out of a total of 407 investment options, 182 underperformed while 80 of those underperformed the benchmarks by more than 0.5%. This was an improvement on the 2021 heatmap when one in four Choice investment options underperformed.
• Choice products that are closed to new members are more likely to underperform and have higher fees than those that are open. Two thirds of closed Choice investment options had poor or significantly poor performance relative to the heatmap benchmarks.
• Average fees for Choice products are higher than fees for My Super products. The average annual administration fee for members with a $50,000 account balance in a closed Choice fund was $225, compared with $149 for open Choice products and $137 for MySuper products.

It should be noted that some members may choose to stay in closed investment options for reasons other than performance, such as insurance offerings.

“Even so, APRA encourages all superannuation members to check whether they are satisfied with the outcomes they are getting from their chosen investment strategies,” says Cole. 

Who is the heatmap for?

As it stands, the heatmap is 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.

APRA says the intended audience also includes policymakers, advisers and employers. Certainly further refinements will be needed to make the heatmaps more accessible to fund members.

Although the heatmap is designed to highlight good and bad performance at a glance, it’s not that simple. To interpret the visuals, you need to wind your way through supporting material beginning with the Choice Heatmap Methodology Paper. 

What is the difference between MySuper and Choice products?

MySuper products offer a single investment option and are designed to be simple, low-cost default products for members who don’t make an active decision on their investment strategy (although any member may choose to be in a MySuper product). As at June 2022, there were 69 MySuper products with 14.4 million member accounts and assets of $884 billion.

As mentioned earlier, Choice products and options are those in which members have made an active decision to invest and are aimed at people seeking greater control and flexibility. They are more diverse and complex than MySuper products and most often accessed via a financial adviser. Super fund trustees may offer multiple Choice products and within these products a wide range of investment options.

Choice investment options enable members to select investment options based on their risk profile, goals and personal circumstances. Choice members generally get access to a wider range of features than members of MySuper products, such as additional website functionality and member reporting.

Due to this wide range of Choice products, APRA’s Choice Heatmap only covers 47% of Choice accumulation products. That is, 163 products – including 604 investment options and 1,038 investment pathways – representing $292 billion in member benefits. 

Investment returns are the primary driver of underperformance

APRA argues performance should be looked at over a range of time horizons to see how products perform in different market environments. The latest heatmap assesses performance over three, five and eight years to 30 June 2022.

As you can see in the graphs below, investment returns even out over eight years compared with a shorter term of five years. Long-term returns are more relevant due to the long-term nature of superannuation.

Of the 604 multi-sector investment options covered, 407 have an eight-year history. Of those with an eight-year history, 182 (45%) underperformed relative to the heatmap benchmarks with 80 (20%) underperforming by more than 0.5% on average per year. You can see a list of the 80 significant underperformers by clicking the button below.

Performance relative to heatmap benchmarks (% of options)

Source: APRA

Choice investment options are more likely to have underperformed than MySuper products, with closed Choice investment options particularly weak. Over 8 years, two thirds (67%) of closed Choice investment options fell below benchmark compared with 39% of open Choice investment options and just 21% of MySuper products.

Fees and costs remain high

APRA found higher fees are common in the Choice sector, especially among products closed to new members.

The median administration fee for closed Choice products is $350 for a member with a $50,000 balance, compared with $177 for open Choice products and $143 for MySuper products.

APRA found 48 Choice products with significantly higher fees and costs (above the crimson threshold across three or more account balances in the heatmap), accounting for 29% of all Choice products included in the survey. You can see a list of these products by clicking the button below.

However, most of these high-cost products have assets less than $10 million and lower levels of member benefits, illustrating the difficulties faced by smaller funds without the economies of scale required to compete on fees and costs.

Not surprisingly, closed products with significantly high fees tend to underperform relative to investment benchmarks.

Sustainability a challenge

Financial sustainability remains a challenge for a large part of the superannuation sector, including Choice funds.

Choice product providers that don’t also offer MySuper products tend to have weaker sustainability ratings, as do those that are closed to new members. They also tend to be smaller funds.

APRA notes that: “Sufficient scale is required to support efficient and resilient business models, keep fees and costs low, and finance operational and service improvements expected by their members and APRA.”

These funds are likely to come under increased pressure from APRA merge or transfer members to better performing options.