Super performance test tweaks pose ‘significant consequences’ for advisers

In April, the federal government published the outcomes of Treasury’s review into the Your Future, Your Super (YFYS) laws, including the super performance test.

Key changes identified by the government include:

• Prospectively increasing the testing period from eight to 10 years to encourage longer‑term investment decisions.
• Calibrating key benchmarks to ensure that funds are not unintentionally discouraged from investing in certain assets.
• Adjustments to the notification letter that trustees of failed products send to members.
• Minor changes to improve accuracy and reduce administrative burden for APRA.
• Ensuring the test is fit‑for‑purpose when it is extended to trustee‑directed products.

“The purpose of this review was to identify any unintended consequences of these laws which might be leading to poor outcomes for members,” Minister for Financial Services Stephen Jones said in a statement.

“The feedback from stakeholders was primarily focused on the annual superannuation performance test, which is intended to hold trustees to account to maximise returns to members. Responding to this feedback forms the first part of the government’s response to the review.”

In its submission to the Treasury consultation, the Financial Advice Association of Australia (FAAA) said that there had not been enough consultation with advisers.

“We would like to express our concerns about the consultation process for this important reform,” the FAAA said.

“The FAAA is the leading association for the financial advice profession, however we have not been directly consulted with in respect to this matter, which will have a substantial impact upon financial advisers.”

The association added that despite financial advisers being key stakeholders, the Exposure Draft Explanatory Statement doesn’t make any reference to how the reforms could impact advisers, and that if the proposals are implemented it would have “significant consequences” for many financial advisers before the end of the year

“There has been no impact analysis undertaken, meaning that there has been no consideration of the impact of this reform on financial advisers and their clients,” the submission said.

“Financial advisers, whilst not usually involved in the recommendation of MySuper products, are very much involved in the recommendation of Choice products. Where clients receive a notification from their trustee that their fund, or one or more of their investment options, have failed the performance test, then many of them are likely to contact their adviser to either complain or seek advice on how to resolve this problem.

“The impact of this is now probably only six months away. The financial adviser population are largely unaware of this issue at present, and will have little idea how this assessment is undertaken.”

In addition to ensuring financial advisers are involved in consultation and the rollout of these provisions, the FAAA made four other recommendations:

• Amend the performance test model to take account of the way mastertrust and particularly wrap products typically operate
• Provide rollover relief to consumers where a trustee or fund manager closes an investment option and transfers the investors to a different option, such that the rollover does not trigger capital gains tax (CGT) for the consumer.
• Improve the wording of the proposed notice to acknowledge that there may be good reasons to continue to hold an option identified as underperforming, including tax and insurance considerations, and that consumers should speak with their financial adviser before making any changes.
• Require providers to ensure a copy of the notice is provided to each member’s adviser at or before the time it is sent to the member.

FAAA chief executive Sarah Abood said the Australian Prudential Regulatory Authority (APRA) performance testing is likely to have a substantial impact on the clients of financial advisers, particularly as it applies to mastertrust or wrap products, and advisers will need to work closely with their clients to manage any issues that arise over the next six months or so.

“While we are not opposed to the introduction of performance testing for Choice products, it is critical that the regime considers the impact on financial advisers and their relationship with their clients. It is also essential that it is fair and does not treat certain products in a way where the performance results are skewed.

“There is a downside risk that needs to be considered, which is that it encourages some clients to make decisions to change products that might not ultimately be in their best interests. We are supportive of a message that encourages clients to consider the performance of their fund, but not one that scares them into making changes without accessing advice.

“We would welcome the opportunity to discuss these issues in more detail with Treasury.”