Think tank says platform investment options should be subject to YFYS test

The expansion of the Your Future, Your Super (YFYS) performance test to Choice products should proceed, the Grattan Institute has argued.

Moreover, the think tank said investment options available via platforms and other channels, which are mostly offered by retail funds, should be subject to the test.

In its submission to the YFYS review, inked by Brendan Coates and Joey Moloney, Grattan suggested that excluding these options may mean that some of the worst-performing choice products are left outside the YFYS regime.

Although Grattan admitted that extending the test to platforms presents “some challenges”, it warned that not doing so was more dangerous.

“Complex structures mean fees and tax may not be uniform for all members invested the same way. However, it is exactly this complexity that can be used to disguise high fees or poor performance,” the think tank said.

Moreover, it noted that an underperforming option via a platform may only represent a small portion of an individual’s overall portfolio, particularly if it is overseen by a financial adviser.

As such, Grattan said that “a separate prescribed letter for Choice products in the regulations should reflect this.”

“The test and its consequences should still apply, as it will provide a benchmark for platform providers and advisers to consider what is being offered and recommended to clients.”

Citing data from APRA’s first Choice heatmap late last year, which found that 60 per cent of products underperformed their benchmark with 25 per cent delivering very poor returns, the think tank stated that Choice is where the highest fees and worst performance are.

The prospect of creating carve-outs for certain Choice products, it said, would be “bad policy” and would increase the risk of the test being “gamed”.

“Introducing subjectivity into the test — such as allowing APRA greater discretion in applying the test — would compromise its integrity and risk recent gains to super fund members,” Mr Coates and Mr Moloney added.

“Funds can always find an excuse for their underperformance or high fees, and regulatory risk aversion suggests this could lead to the policy being toothless.”

The Grattan Institute said that maintaining the integrity and objectivity of the YFYS test is critical to achieving better outcomes for members, and that the government should be seeking to make “incremental improvements” to the framework rather than wholesale reforms.

To date, 10 of the 13 funds that failed the inaugural YFYS performance test in 2021 have merged — or are in the process of doing so — while the other three have reduced their fees.

The Grattan Institute estimated that members of these funds are now paying fees that are around 20 per cent lower, representing a saving of more than $100 million.

“The objective nature of the test was critical to achieving these benefits and must be protected,” Mr Coates and Mr Moloney wrote.

“There is scope to refine and improve the test, and any changes that improve its operation without compromising its integrity should be welcomed. But the broad structure of the test must be retained.”

Among the suggestions put forward by the Grattan Institute, the think tank argued for the performance test time frame to be extended to 10 years from the current eight years, and for new asset classes to be added to the test where appropriate.

“The super industry would prefer to be left alone, or to have the opportunity to convince the regulator that they shouldn’t have to change,” Mr Coates and Mr Moloney said.

“But too many Australians have already suffered poor outcomes in superannuation for far too long. Maintaining the integrity of the Your Future, Your Super reforms will help ensure that won’t be the case in future.”

Jon Bragg

Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.