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Underperfoming Funds Must Go | Due Governance

So why are the big guns out for smaller Funds?

Challenger have just released a report on retirement outcomes, and there’s plenty of good news here for the super industry.  Individual’s in their retirement phase typically have over $300,000 in their superannuation funds, while a couple just hitting retirement will on average have around $400,000.  These healthy balances now mean that reliance on the Age Pension is reducing.  Only 25% of 66 years olds are now receiving the full pension.  Although it’s taken some time to get here, superannuation is now serving its purpose, and we can expect balances to continue to grow across all age groups.

But depending on your position, the report is not all good news.  Much of it validates what APRA and the Productivity Commission have been worrying about.  While the averages look great, there are some segments of the population who are missing out and will still end up having to rely on a full pension.  Some segments will need to access the full pension because they didn’t have stable full employment.  But are some retirees being let down, not because of low contributions, but because they have relied on an underperforming fund?

The Productivity Commission has said:

All MySuper and choice products should have to earn the ‘right to remain’ in the system under elevated outcomes tests. Weeding out persistent underperformers will make choosing a product safer for members

We couldn’t agree more. 

We used APRA’s most recently published 5-year return data for all regulated (RSE) superannuation Funds.  And using the same methodology as the Productivity Commission to set a hurdle rate, guess how many ‘small’ Industry Funds produced returns below that rate?  Zero.  Let me repeat that:


Don't believe me? Here's the results:

We did the same thing for Public Sector superannuation funds.  And the number of underperforming Funds in that category was a bit higher. Do you know how many?


For-profit and corporate funds have clearly have brought down the averages while Industry and Public Sector Funds have stayed on top.  And while the averages look great, regulators are worrying about more than that.

It’s clear that some Funds aren’t in the system for the benefit of their members.  The regulators are making sure that there are some very frank conversations happening right now because they want to weed these Funds out. 

It’s obviously not member returns that are really driving their view of ‘member outcomes’. This is a fundamental challenge to conventional wisdom.  And this means a major rethink about ways to address clear and present dangers is starting to occur. 

The biggest tragedy for the industry right now is that many Funds that are actually delivering outcomes for members are going to get thrown out with the proverbial bathwater.

So the focus now turns to investment costs, administration costs and services, insurance costs, membership growth and sustainability, cashflows, and so forth.

Despite a history of producing some of the strongest member outcomes, numerous Funds are now at threat of entering into a death spiral. This is where costs per member escalate faster than incoming members and cashflows. The key to solving this is for Funds at risk to understand what options they already have to reduce costs per members.

We agree, persistently underperforming funds must go. The Funds that survive will be the ones that are prepared to be part of challenging their own conventional wisdom. This starts by having some frank discussions.

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