APRA heatmaps will shine a light on underperformance and improve transparency

THE regulator’s new heatmaps are a welcome new tool to help identify underperforming funds but further work needs to be done to get the methodology right, Industry Super Australia said.

Underperformance can cost some members up to $500,000 in their retirement nest eggs, so must be tackled wherever it is found in the superannuation sector.

The Australian Prudential Regulation Authority’s (APRA) heatmaps are an important first step in highlighting underperformance and making trustees more accountable.

But ISA has some concerns in the methodology APRA used to generate the heat maps, these include:

- The failure to give primacy to net returns (after all fees and costs) for performance benchmark comparisons as the Productivity Commission did

- Excluding the effect of admin fees in much of the benchmarking, despite acknowledging high admin fees are associated with poor performance

- The use of simplistic and arbitrary metrics to adjust for risk which may materially affect the benchmarks a product is compared to

- Not assessing long term returns (10 years or more) where data is available.

Importantly the heatmaps should be expanded to cover the Choice sector, as underperformance is not limited to MySuper products, in fact, most underperforming products are in the Choice sector.

With too many Australians still stuck in underperforming super funds, the focus of the Government, regulator and the superannuation sector must be on ensuring members are connected to a single, quality-checked and high performing fund with low fees and good returns.

Tools such as APRA’s new heatmaps will provide an important bottom-up approach to tackling underperformance, rather than a top-down approach.

Industry Super Australia deputy chief executive Matthew Linden said, "As a priority, the costly drain of underperformance needs to be dealt with – wherever it occurs in the system. APRA’s heatmaps are a vital tool to shine a light on this underperformance and get trustees to lift their game, but more work is needed to get the detail right.

“We expect to see the worst performers called out, but are concerned methodological flaws may cast some products in a poorer light than warranted, while other products appear okay when they’re not.

“With any new measuring tool there are always kinks to iron out and we look forward to working with APRA as they refine the first cut of analysis and update the results in the new year.”

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