The Your Future, Your Super (YFYS) package of superannuation reforms is a significant development for the industry, with serious consequences for funds identified as underperformers.
As an asset consultant, Frontier is primarily focussed on the YFYS performance test, which uses a listed SAA benchmark assessed over rolling eight year periods. Our view of the YFYS performance test is that it is a relatively narrow framing of performance – it assesses the implementation of an investment strategy (e.g. via active management and sub-asset class risk allocation). It does not assess whether a fund has selected a good strategy nor whether it has achieved a reasonable net total return or risk adjusted return outcome for members. Frontier is participating in the Conexus Institute YFYS working group which echoes the concerns that the performance test will be ineffective at identifying poor performing funds while introducing a range of undesirable outcomes.
We are particularly concerned the test may prove limiting to investment decision-making at a time when the investment environment is challenging, and total portfolio outcomes may be best optimised outside of a traditional SAA framing. Funds will need to work out how to consider this test alongside existing investment objectives and in the context of their investment philosophy. A key step is understanding how portfolios are positioned relative to this new listed SAA benchmark. While the test is not yet finalised, it is scheduled to begin in mid-2021. As a result, our advice to superannuation clients this year incorporates a YFYS test perspective across asset classes and the total portfolio.
In December 2020 we provided a submission to Treasury’s consultation on the YFYS package of reforms. We provided our views on how the package could be enhanced to better achieve the Government’s policy aims. Our submission suggested a solution that we think better integrates the goal of empowering members with the more complex matter of holding funds to account for underperformance. You can read our submission here.