APRA shines light on choice super sector

The Australian Prudential Regulation Authority (APRA) has published analysis of the performance of choice superannuation products ahead of releasing its first Choice Product Heatmap in late 2021.

As with APRA’s MySuper Product Heatmap, which was launched in December 2019, the Choice Product Heatmap will provide clear and comparable insights on the performance of choice products in the areas of investment returns, fees and costs, and sustainability.

Choice products¹, which account for 46 per cent ($859 billion as at 30 June 2020) of total APRA-regulated superannuation member benefits, are products that members have generally actively chosen to join. They are typically more complex and varied than default MySuper products, making comparisons more challenging.

APRA’s analysis of the sector, published today in an information paper, identified 568 choice products within APRA-regulated superannuation funds, offering approximately 9000 distinct investment options and about 43,000 investment options in total. 

Most significantly, the analysis has highlighted underperformance in the choice sector. In particular, it showed:

• the median administration fees of choice products analysed by APRA are approximately 40 per cent higher than the median MySuper product (based on a $50,000 representative member); 
• investment performance displayed considerable variation for options with similar allocations to growth assets; and
• a materially higher percentage of choice options underperformed a risk-adjusted, peer-derived benchmark by more than 75 basis point than MySuper options (15 per cent compared to 7 per cent).

APRA Executive Board Member Margaret Cole said the findings demonstrate the importance of exposing and addressing underperformance among choice products. 

“Transparency is a powerful tool for lifting standards and weeding out underperformers. Since the first MySuper Heatmap was published, 11 funds exited the industry between December 2019 and December 2020, while members have saved a total of $408 million in reduced fees.

“Historically, the choice sector’s complexity, variety and sheer volume of options have helped to shield poorer performers from scrutiny. By shining a light on choice products that are failing to deliver quality, value-for-money outcomes, APRA expects to see the same types of improvements for the 34 per cent of member accounts  in the choice sector,” Ms Cole said.

The first Choice Product Heatmap will focus on multi-sector investment options in open, accumulation products (excluding platform products), representing 40 per cent of total member benefits in the APRA-regulated choice sector. This segment is also the most similar to MySuper products, enabling direct comparisons between the sectors. It provides an important pre-cursor to the Your Future, Your Super legislated annual performance test, which comes into effect for choice products from 1 July 2022.

Future versions of the Choice Product Heatmap will be expanded as APRA capitalises on the enhanced data set delivered through the Superannuation Data Transformation and APRA Connect programs.

“The new Choice Product Heatmap will make clear which trustees have underperforming choice products and where they need to lift their games. Trustees are expected to identify the reasons for their underperformance and take prompt action to address those issues,” Ms Cole said.

“With the annual performance test for choice products coming into effect next year, trustees of products that show up bright red across the heatmap would be well advised to quickly rectify any weaknesses.” 

Copies of the information paper are available on APRA’s website at: Choice sector performance: improving outcomes for superannuation members.

Footnotes:
 

¹ Choice products includes assets in non-MySuper products (excluding define benefit), which includes member benefits in the tax-free phase.