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Australian pension savers risk being bamboozled by choice, says regulator

Australia’s A$3.3tn ($2.3tn) superannuation sector watchdog has raised the alarm over the high number of funds retirement savers wishing to make their own decisions can choose from and has pledged to crackdown on trustees failing to weed out poorly performing products.

Margaret Cole, an executive board member of the Australian Prudential Regulation Authority, said the body would be having “serious” conversations with trustees that were not improving so-called choice superannuation products for members and it was “troubled” by the number of options offered on the market.

“It is trustees’ job to make sure they are acting in the best financial interests of the members,” Cole told the Financial Times. “We’ve got to hold the trustees’ feet to the fire. So I would expect us to get very active on [choice products] this year.”

The choice sector is a significant component of Australia’s pensions industry, representing 46 per cent, or A$859bn, of total member benefits in Apra-regulated superannuation funds.

Choice products are funds that members have actively chosen to join and are typically more complex and customisable than the low-cost, default “MySuper” products offered to all superannuation members.

But choice funds are coming under greater scrutiny for their higher fees and poorer performance compared with MySuper options.

More than 60 per cent of choice investment options recently examined by Apra had returns of less than the watchdog’s new “Heatmap” benchmark, with 25 per cent of options delivering significantly poor returns.

With about 568 choice products offering around 9,000 distinct investment options, Cole said members were at risk of being bamboozled.

“We are troubled by the proliferation of products in the choice area,” she said. “We have to question whether that is providing a good outcome for members.”

The superannuation sector crackdown comes as Apra faces industry criticism over new performance tests that came into force for MySuper products last year. Recent reforms require Apra to subject MySuper funds to annual tests — separate from the Heatmap analysis — based on an assessment of at least 5 years of performance history against an objective benchmark. Choice products will be subject to the same tests later this year.

Thirteen out of 76 MySuper products failed the inaugural performance test in 2021, with the failing funds — covering around 1mn members — named and shamed and required to write to their customers.

But the performance test has been criticised for being too crude a measure of investment suitability for a member.

“Some industry participants have suggested that there are limitations to [the test] because essentially it is measuring performance and fees, not other metrics,” said Cole. “My view of the performance test is that it enables a lot of focus on this area, which I think is vitally important. I don’t consider it flawed.”

Since the first performance test, a number of failed funds have merged with better run funds, exited the market or closed. “I think it has done what it was supposed to do,” added Cole.

But she expressed surprise that more members had not closed their accounts after receiving a letter from a failed superannuation fund suggesting they move their money to a different product and said different channels of communications, such as apps, might be more effective.

As of November last year, just over 68,500 member accounts had been closed, representing about 7 per cent of accounts in the 13 products that failed.

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