Superannuation Fund Comparison Tools
As part of the Federal Budget on 6 October, the Government announced the development of a new online superannuation comparison tool, Your Super. The tool ranks simple super products by fees and investment returns.
The intent is to ensure individuals have all the information they need to select a “well-performing product rather than an underperforming one”. The Government then intends to performance test the superannuation funds annually and may prevent a fund from accepting new members if they fail the performance test in two consecutive years.
If implemented well, this tool would provide a benefit to Australians invested in superannuation. However, this is not the first attempt that has been made to create a simple, yet valuable, comparison tool.
Groups like Super Ratings and Chant West have each been comparing superannuation funds for over the last 15 years.
So what difficulties may arise when accurately comparing superannuation funds? We have explored some of the key issues.
Performance comparison timeframes
The Government has not yet communicated the investment return comparison timeframes it intends to use.
Let me explain how timeframes can be misleading when comparing superannuation fund returns.
Table 1 is a one-year return comparison. You will see Suncorp Brighter Super Pers – Suncorp Multi-Manager Growth Fund is the top performer.
Table 1: Top 10 Super Funds
Table 2 is a five-year return comparison. You will notice the same fund is nowhere to be seen. SuperRatings does not provide the default option to assess the various funds more than five years.
Table 2: Top 10 Super Funds
It is worth asking whether a high-performing super fund will continue to perform well over the next five years? What happens if a super fund hasn’t been around for a long period of time? Are they a good fund or bad fund?
Historically, short-term to medium-term historical investment performance has been a poor indication of future performance.
Of course, no one knows the future. However, assessing long-term investment fundamentals has provided a better indication of future outcomes. For this reason, we would recommend utilising a long-term investment comparison in your decision making. Our view (based on the assessment of historical data) is five years is a very short-term for comparison when the investment horizon is likely well beyond 15 years.
The risk
Typically, superannuation comparison tools have completely disregarded the risk taken in order to deliver the presented return outcomes. Risk is a key component when assessing the investment of your superannuation funds. It is just as important as the return itself.
It should not be a surprise to most people that funds with a higher growth allocation typically generate a higher long-term return, relative to those with a lower growth allocation. Likewise, a fund with a higher growth allocation typically comes with a higher level of relative risk.
Take the same comparison tool as an example. You will notice in the Option Type section the category for assessment is for a Balanced Fund. You will also notice the Balanced Fund can have anywhere between 60% to 76% growth assets and still consider themselves a Balanced fund. We would argue that a 16% difference between growth allocation when comparing funds is significant and has a meaningful difference to both return and risk outcomes.
As a side note, the term Balanced to many people means close to 50% growth and 50% defensive assets, however, that is not the defined parameters set. We believe it is unwise to disregard risk when assessing the appropriateness of any investment.
Separating super fund administration from investment
One of the key issues super fund comparison tools have had in the past is the difficulty in separating out the administration and investment side of the assessment process. Often superannuation members incorrectly assume that the name that sits on top of their statement is the same group that physically invests the funds in the various markets. Rarely, is this the case.
The administration of a superannuation fund is a completely separate function to investing the funds on behalf of the membership. The administration function relates to providing a call centre, website, submitting the tax returns of the fund, making pension payments, collecting and reporting contributions. The fund administrator is typically the name that sits on top of the statement. The investment function relates to selecting individual investment managers and/or securities to invest into.
Superannuation fund administrators allocate all or part the accumulated fund pool to various fund managers who invest on behalf of the individual fund’s members as well as the members of other funds. We believe it is beneficial to separate out the two functions and select each on its individual merit. This requires you to determine who the best available for administration andwho is best available for investment. They are completely different roles.
When Josh Frydenberg (Treasurer) states “Poor-performing super funds will have nowhere to hide and will be required to notify their members of their underperformance”, our first question would be, in which function, is the super fund performing poorly?
In summary, we believe developing a simple comparison tool would be a fantastic initiative if it provided a quality and thorough comparison between the various options available in the market. Unfortunately, historical data would suggest it is far more likely to provide a narrow comparison scope, providing a limited assessment of the various options available on the market. We wait with anticipation.