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Your benchmark or mine?
BY POOJA ANTIL | FRIDAY, 26 MAR 2021   3:59PM

As part of the APRA super fund performance test to be introduced later this year, funds will be called to account for how their MySuper product performs against benchmarks created for them by the regulator.

The new performance framework will become the key method for targeting underperformance in superannuation sector. Existing methods under the law like APRA heatmaps and the annual member outcomes self-assessment will be amended accordingly.

While there has been much discussion about asset mixes and the indexes that will be used to assess them, the wildcard is how, or if at all funds, will be judged against their own investment objectives.

The SIS Act requires an RSE licensee (registerable superannuation entities) to formulate and implement an investment strategy. As part of this investment strategy, each RSE is required to determine investment objectives for every investment option they offer. These should be set out in disclosure documents along with other performance metrics like risk level, risk labels, etc.

In 2012, with the introduction of the MySuper legislation, fund trustees were required to provide their members with specific information in a product dashboard about how the product performed in relation to five separate measures, return target being one of them.

This, however, was a sure-fire recipe for confusion because the legislation had different requirements for each measure and how and whether it should be disclosed in either the PDS or product dashboard.

For example, funds generally disclose to their members the MySuper product's investment objectives in the PDS but disclose the product's return target in product dashboard.

Though the two do not differ hugely, they aren't the same either.

But how is a member expected to distinguish between the two? Should they be looking at both or just one? If one, which one? Sure, superannuation is nuanced but this is getting silly.

Adding even more confusion, APRA in their prudential practice guide SPG-530 on investment governance, on page 6, when it refers to investment objectives, does not actually refer to them as single metric. It describes them as composite measures that blend the target return with the Standard Risk Measure.

"APRA expects investment objectives would be measurable, formally documented and clearly communicated. A statement of investment objectives would ordinarily include a clear expression of a measurable target investment return and a measurable target level of risk exposure".

Return target is meanwhile defined in Reporting Standard SRS 700.0 Product Dashboard as "the mean annualised estimate of the percentage rate of net return that exceeds the growth in the CPI over ten years".

This implies that in practice investment objectives are broad-natured and reflect what a fund desires to achieve whereas return target is a more specific but conservative metric expressed in terms of percentage returns over and above inflation over a certain period. Note when a fund declares a return target, this means it should have a two-in-three chance of achieving that target.

Another element of what may be adding to the complexities around these definitions may be that up until now super funds' investment objectives have probably not been reviewed systemically.

Not only were funds never held accountable if they did not achieve their objectives or targets, but they were also probably simply ignored. Illustrating this, a recent Rainmaker Benchmarking Superannuation report found that at end June 2020 only two-thirds of MySuper products were on-track to achieve their return targets over a 3-year period.

This raises the further question as to why do funds need to mention their investment objectives or return targets in their regulatory documents when even the regulator is not looking at them?

But perhaps a much bigger issue is whether the regulator, while constructing their custom benchmark for each fund, will in effect add a third dimension to this regime of investment objectives and return targets. That is, as part of the performance test they will create their own investment objective for each fund based on its asset allocation.

Alternatively, will this new framework in effect will make investment objective and target returns redundant?

So maybe the first objective for APRA in setting up their performance test is defining what they mean by all these investment objectives.

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