Information paper: Combining trustee-directed product performance histories – APRA’s approach April 2023

Chapter 1 - Introduction

The Your Future, Your Super measures (YFYS measures) came into effect on 1 July 2021 and are designed to ensure superannuation works in the best financial interests of all members.¹ APRA supported the Government in implementing the Your Future, Your Super measures in three key areas:

1. Administering the annual performance test (‘performance test’) for superannuation products and holding funds to account for underperformance, which includes enhancing industry transparency through publication of the results of the performance test;
    
2. Providing superannuation data about MySuper products to the Australian Tax Office (‘ATO’) for inclusion in the YourSuper comparison tool (‘comparison tool’), empowering members to choose a well-performing product that meets their needs; and
    
3. Ensuring investment governance and fund expenditure are in line with members’ best financial interests

The Superannuation Industry (Supervision) Regulations 1994 (‘the Regulations’) outline the methodology for the performance test. Treasury has recently released the Exposure Draft of the Superannuation Industry (Supervision) Amendment (Your Future, Your Super—Addressing Underperformance in Superannuation) Regulations 2023 (‘Performance Test Regulations 2023’).² This Information Paper may be updated, where necessary, once the Performance Test Regulations 2023 are finalised. The performance test applied to MySuper products from 1 July 2021 and applies to trustee-directed products (‘TDPs’) from 1 July 2023. 

The performance test is a two-part test and involves:

(i)    an assessment of investment performance relative to a benchmark portfolio created using the product’s strategic asset allocation; and 

(ii)    an assessment of administration fees charged in the last financial year relative to the median fee charged for the category of product. 

If the product underperforms the combined test by more than 0.50% per annum, the product is deemed to have failed the performance test. Where a product fails the performance test in two consecutive years, the RSE licensee will be prohibited from accepting new beneficiaries into that product. 

This paper outlines the principles and methodology APRA applies when issuing a determination to combine the performance histories of two or more TDPs in administering the performance test. 

Chapter 2 - Combining the performance histories of TDPs in the performance test

APRA has the power to combine the performance history of two or more products in administering the performance test, enabling an assessment of a product’s performance using a continuous performance history under a range of scenarios, where it is appropriate to do so.³   

In August 2021, APRA published the Information Paper – Combining MySuper product performance histories – APRA’s approach, which outlines the principles and methodology for combining product histories for MySuper products.⁴ APRA’s principles and methodology for TDPs are broadly consistent with those outlined for MySuper products. However, a varied approach is required for TDPs due to the key differences between the nature of these two product universes. 

Product features are not legislated for TDPs, in contrast to MySuper products, which are subject to certain requirements and obligations in the Superannuation Industry (Supervision) Act 1993 and Regulations. Further, while APRA authorises RSE licensees to offer MySuper products, an RSE licensee is not required to seek authorisation from APRA to offer TDPs, or choice products more generally. 

The performance of multiple TDPs may need to be combined to facilitate the administration of the performance test, in the following scenario: 

• Across-product change – In this context, an across-product change is where members in a TDP have been transferred into another TDP. This could be as a result of a structural change, such as a merger or SFT, where members and assets of a predecessor TDP have transferred into another RSE as a successor TDP. 

APRA will follow the following principles when determining when to combine the performance of multiple TDPs. APRA will treat similar scenarios consistently. 

Principles for combining the performance of multiple TDPs:

1. Avoiding product ‘phoenixing’: In line with the policy intent, the choice of when to or how to combine the performance of multiple TDPs must not facilitate situations where trustees intentionally close a product and open a new but similar product to avoid being assessed in the performance test. 

2. Identifying a predecessor product to create the combined product: Combining the performance of multiple TDPs should use the actual return history of products where possible, avoiding using amalgamated data or creating blended returns using data from multiple TDPs. Where two or more products are combined into a new product, a predecessor product should be identified. The following criteria will be considered when determining the predecessor product:

- Continuity of control – for example where there is consolidation of products under RSE licensees within the same corporate group, APRA will consider identifying the predecessor TDP as the one with the same RSE licensee or management as the successor TDP;

- Continuity of product design – for example, where two products are consolidated into one, APRA will consider identifying the predecessor TDP as the one with materially similar product design (such as the investment strategy) as the successor TDP;

- Members impacted – for example, where two products are consolidated into one, APRA will consider identifying the predecessor TDP as the one with the majority of members.

3. Continuation of return history achieved by the TDP: Combining the performance of multiple TDPs should not allow the performance achieved by a continuing TDP to be replaced with the performance achieved by another TDP in the product range. Where an RSE licensee replaces the investment strategy of a TDP with the investment strategy of another product within the product range, the performance of the TDP will not be replaced by the performance of the other product in the range.

4. Performance of continuing TDPs should be maintained: When a TDP, in practical terms, continues as a result of a merger or successor fund transfer (SFT), the historical performance of the continuing product should be assessed for the performance test, unless exceptional circumstances exist.

Submission to APRA

As part of APRA’s process for administering the performance test for TDPs, APRA expects an RSE licensee to notify APRA where they are of the view that two or more TDPs should be treated as a combined product with a continuous performance history. APRA will consider across-product changes on or after 1 July 2021.⁵ 

An RSE licensee seeking to combine its products’ performance histories is requested to complete the ‘TDP mapping’ spreadsheet available on the APRA website and submit this to APRA, along with any attachments.⁶ The RSE licensee needs to provide details of:

• the products the RSE licensee considers should have their performance histories combined; 
   
• the basis for the application to combine the performance histories, including confirmation that the application is consistent with the principles set out in the Information Paper; and
   
• how members and assets have moved between the products.

An RSE licensee’s request must reflect the above principles and consider how the RSE licensee has already disclosed, or how it intends to disclose, performance to members, in line with requirements set in Australian Securities and Investment Commission Act 2001 and Corporations Act 2001 and relevant guidance, such as ASIC Regulatory Guide 53 The use of past performance in promotional material.

APRA will also monitor data submitted by RSE licensees required under reporting standards and engage an RSE licensee when data indicates circumstances where combining the performance history of two or more TDPs could arise. 

Chapter 3 - Methodology for combining performance histories in the performance test

APRA has developed a methodology to be able to administer the performance test where performance is combined for across-product changes. The methodology APRA will use to combine performance in the performance test for TDPs follows key principles which are based on the existing principles for MySuper products⁷. These principles are: 

1. The performance of a TDP is calculated on a quarterly basis, with each investment option treated as an individual TDP.
    
2. A product’s performance is calculated using data reported to APRA on a quarterly basis, with the exception of any quarters where there has been an across-product change. For such quarters, the performance is calculated by splitting the quarter into partial periods to reflect the product before and after the change. An RSE must report data for the associated partial periods to APRA.

Footnotes:

¹ Treasury Laws Amendment (Your Future, Your Super) Act 2021 received royal assent on 22 June 2021.

² Treasury consultation on Superannuation Performance Test Regulations 2023.

³ See regulation 9AB.7(4) of the YFYS Regulations.

⁴ APRA releases information paper on combining MySuper product performance histories.

⁵ APRA expects that historical data up to 30 June 2021 will be reported under SRS 550.0 Asset Allocation and SRS 705.1 Investment Performance and Objectives for products, investment menus and investment options, including the historical data for any investment options that were transferred or continued in a new product. 

⁶ Your Future, Your Super legislation and supporting material.

⁷APRA releases information paper on combining MySuper product performance histories.