ISA claims funds are gaming the system

Industry Super Australia (ISA) said its analysis of the Your Future, Your Super (YFYS) test results shows that some super funds shifted investment assets into different categories and exploited a fee loophole to artificially boost their results.

In the two years that the YFYS benchmarking has taken place, the sector’s performance has not improved, which ISA claims is partly due to test manipulation.

“This assessment has allowed too many dud funds to bend the rules, so they pass, leaving their members with the same lousy returns and high fees,” said Industry Super Australia deputy chief executive, Matthew Linden.

“While some funds cut fees to pass the test, many of them are still delivering poor returns to their members.”

In its submission on the review of the YFYS test’s methodology, ISA recommended a number of changes to curb these tactics, such as extending the assessment period for products and changing how they are measured.

According to the ISA, before the inaugural 2021 benchmark, 35 funds reclassified investment assets, with many reducing exposures to ‘other’ assets with a higher 5.1 per cent benchmark while increasing exposure to the lower benchmarked fixed income (1.8 per cent) asset class and cash, effectively improving their test scores without increasing returns to members.

The body also took issue with the decision to only include one year of administration fees, rather than the eight years that all other metrics are based on, which it said allows funds to reduce administration fees but increase other charges.

The ISA said this loophole has improved the test outcomes by an average of 0.06 per cent overall, including 0.10 per cent for corporate MySuper products and 0.20 per cent for retail MySuper products on average.

“Six products passed the 2022 test that would have failed if all eight years of administration fees were included and benchmarked against the median member administration fee,” the ISA said in its analysis.

“There were 13 funds that decreased administration fees with either no change or an increase in total charges.”

Mr Linden added: “Performance testing is a good thing, but to unlock its full potential, funds should be measured on what value they are adding to their members' retirements — not how they can game the system.”

In October, accounting associations Chartered Accountants Australia and New Zealand (CA ANZ) and CPA Australia also raised a number of concerns about the YFYS performance test.

CA ANZ and CPA Australia argued that the YFYS performance test focuses on the execution of an investment strategy rather than on the investment strategy itself.

“It is possible that an investment option may underperform in relation to the performance test but show strong relative performance on a net returns basis,” they explained.

“In addition, by its very nature, the use of the median administration fee charged as a benchmark means that, at any given point in time, 50 per cent of all products assessed will underperform with respect to the administration fee by definition.”