APRA’s performance test: Platforms miss the mark

Results for APRA’s annual superannuation fund performance test were released at the end of August, and the verdict was mixed.

For the first time, all MySuper options and non-platform choice products passed the test; for choice options offered via platform services, the result was grimmer.

Choice options need to be actively selected, while MySuper is the default option you will be placed in if you don’t choose an alternative.

Platform services provide access to a wide range of investment options but are known for being expensive, which can put a drag on returns. Almost 20% of the choice platform products tested in 2024 failed the performance hurdle.

The Australian Prudential Regulation Authority (APRA) says the test is intended to hold super trustees to account for underperformance through greater transparency and increased consequences. So far, all products that have experienced two or more test failures in the past have closed, demonstrating that the strategy appears to be working. Persistently underperforming products are being removed from the market.

How the annual performance test works

APRA is required to assess the performance of all MySuper products annually. In 2023, the requirement to test certain choice products was added – after initially being planned to begin in 2022.

APRA uses data about performance, fees and strategic asset allocation (SAA) provided in mandatory super fund reports as well as information about the return of indices that represent each asset class tested.

To perform the test, APRA constructs a benchmark portfolio that matches the strategic asset allocation of the product being tested. This benchmark uses the real return from the index selected to represent each asset class – for example, the Australian shares portion is represented by the S&P/ASX 300 Total Return Index.

By combining the returns of each underlying index in the proportions that occur in the option’s strategic asset allocation, APRA comes up with an expected return for that asset allocation if it earned a return matching the indices.

The return of the benchmark (after deducting fees and taxes) is then compared with the real return of the product after investment fees and taxes.

Performance history over at least seven years and a maximum of ten years is included. If the product’s actual return over the testing period is lower than the benchmark return by 0.5% per year or more, it fails the test.

What the test is effectively doing is asking the question: How did the real return of the product compare with what would be expected if it was passively invested in index funds with the same strategic asset allocation?

A complicating factor is that there is no index for alternative investments, so the benchmark for alternatives is instead made up of a mix of international shares and fixed interest.

Which Choice products are tested?

The first point that needs clarification here is the word ‘product’. When you think of a super product, you probably envision a super fund and all the investment options that fund offers. For the purposes of the performance test though, a product is an investment option. A super fund with 10 investment options is offering 10 super products – according to APRA.

Next, not all choice products are included in APRA’s performance test. To be included, a choice product must be a Trustee Directed Product (TDP). A TDP is an investment option that is offered in the accumulation phase, contains at least two asset classes, where the trustee has a degree of control or influence over the investment strategy.

This definition excludes many investment options offered via super platforms, where the investment management is completely independent of the trustee, conducted instead by investment management firms that are not associated. It does not exclude platforms entirely though, as a subset of the investments they offer are usually provided by the same entity as the trustee.

All up, a total of 590 choice products (investment options) were tested in 2024.

Products that failed

Of the 590 choice products tested, 37 failed to meet the test benchmarks – or just over 6%. This is an improvement from almost 12% of choice products that failed last year and likely reflects trustees withdrawing options that were performing poorly. This year’s test was applied to 215 fewer choice products than last year, demonstrating a significant reduction in the number of options available in this space.

All this year’s failed products are offered via just two platforms, AMP’s North (also known as the Wealth Personal Superannuation and Pension Fund) and IOOF’s Expand (also known as the IOOF Portfolio Service). IOOF has one failed option, a product inherited from a recent merger with MLC, with the remaining 36 failures all belonging to AMP.  

Among the failures are 27 products that have missed the mark two years in a row. These are now closed to new members as required by law. Approximately $1.5 billion held by 14,000 individuals is invested in the products that failed for a second time – indicating that for many people, the first failure was not enough to prompt a move. 

Consequences of failing the test

When a product fails the test for the first time, the trustee must write to all members with money in that investment option. The wording of this letter is specified in regulation, to prevent funds from attempting to put a positive spin on the message. Essentially, the letter explains the investment option has failed the test and you should consider moving your money to another option or super fund.

The letter will also direct you to use the government’s YourSuper comparison tool to search for a suitable alternative fund – although this tool only compares MySuper options.

For a more comprehensive comparison, including your chosen investment, learn how to compare super funds in seven easy steps.

If a product fails for a second consecutive year it must be closed to new members and existing customers must again be sent a letter explaining the failure. Existing members can keep money in the option, but new investors can’t be added.

Super trustees with failed products are required to assess the implications of failing the test on business operations and consider whether members’ financial interests would be best served by transferring them to another product or fund.

APRA will be keeping a watchful eye on the trustees responsible for this year’s double failures to ensure they take appropriate action. In the past, all products with two consecutive failures have been closed, either by merging with another fund or by transferring remaining member balances to the ATO for consolidation with an active account.

What about retirees?

One blind spot in the performance test is that it doesn’t currently apply to any products solely in the retirement (pension) phase. This leads to some lack of transparency over fees and performance for pension account holders.

If your fund has failed investment options in the accumulation phase, it pays to be suspicious of the corresponding pension options, as the underlying investments for options with the same name will be similar, if not identical.

Xavier O’Halloran, director of Super Consumers Australia (SCA) says: “The bad news is there’s little transparency over retirement products’ fees and performance, and no accountability for funds that poorly manage retirement products. Without this, how can the growing number of Australian retirees be confident that their fund is operating in their best interests?” 

SCA is calling on the government to expand an appropriate performance test to all APRA-regulated funds, including retirement products, as a matter of urgency.

What to do if you’re in a failed option

If you’re invested in a failed option, it’s time to reassess your super.

If you’re happy with your fund overall, you can consider looking for an alternative investment option in their menu that suits your risk appetite and didn’t fail the test.

If you selected your investment for reasons other than its return potential, such as sustainability factors, you might even be happy to stick with it, although it’s certainly worth comparing with other sustainable options.

Alternatively, you might want to consider moving to an entirely new fund. Many funds offer a free comparison tool on their websites, or you can follow our guide on how to compare super funds.