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Myth-Busting APRA’s Super Fund Test: A Guide to Informed Financial Decisions

Myth-Busting APRA’s Super Fund Test: A Guide to Informed Financial Decisions

Recently, the Australian Prudential Regulation Authority (APRA) carried out its annual performance assessment on superannuation products. The results disclosed that certain funds are significantly underperforming. This evaluation is significant as it gauges how super funds measure up against fixed benchmarks for fees and investment returns. 

It improves accountability and transparency in the superannuation industry. However, it is crucial to approach these findings with a critical eye and comprehend what is being compared.

Understanding APRA’s Performance Test

The performance test conducted by APRA is a thorough assessment that evaluates superannuation products based on established benchmarks, with a primary focus on fees and investment returns. This year, the test was expanded to encompass 805 trustee-directed products, providing a more comprehensive overview of the choice sector in addition to the default MySuper products.

The outcome of the test indicated that 96 trustee-directed products and one MySuper product did not meet the benchmarks, underscoring concerns within the superannuation sector. It is important to delve a bit deeper into these results by identifying the specific products and companies involved and the underlying reasons for their underperformance.

The results of APRA’s performance test have significant implications for both superannuation fund trustees and members. 

If a product fails to meet the benchmarks set, the trustees must inform their members of the test results, enhancing transparency and accountability. Moreover, products that fail for two consecutive years are prohibited from accepting new members, underscoring the necessity for continuous improvement and adherence to performance standards. 

Some trustees with multiple failed products are already implementing rationalisation programs to enhance member outcomes.

Myth-Busting: What is Really Being Compared?

MySuper funds are the default superannuation accounts designated for individuals who haven’t selected a specific super fund when starting a new job. These funds are designed to offer a straightforward and cost-efficient investment solution. While retail, industry, and corporate super funds can provide MySuper accounts to members still accumulating wealth, it’s worth noting that MySuper funds aren’t available for defined benefit schemes or as pension accounts for retirees.

The inclusion of trustee-directed products in APRA’s performance test has broadened the comparative spectrum, introducing a variety of fund types into the evaluation. Trustee-directed products, part of the choice sector, allow members to actively select their investment options, sometimes prioritising factors other than performance. It’s imperative to understand that the comparison encompasses various fund types, each with distinct characteristics and objectives.

At Wealth Architects, we emphasise that our client’s recommended portfolios typically do not include MySuper or Trustee-directed products. Our portfolios are generally bespoke, tailored to each client’s unique financial goals and risk tolerance, and therefore, are rarely featured in APRA’s performance test. Our recommended portfolios are crafted as a reflection of our client’s aspirations and risk appetite, eschewing a one-size-fits-all approach.

Scenario Comparison: A Tale of Two Investors

Consider two distinct scenarios: one involving a retiree with a conservative approach to investment and the financial means to take minimal risks, and the other involving a younger client with the timeframe and capacity to adopt a more aggressive risk profile.

Scenario 1: The retiree, having accumulated sufficient wealth for a comfortable retirement, prioritises capital preservation over high returns. Their portfolio might be heavily weighted towards defensive assets, such as bonds or cash, to minimise exposure to market volatility. Comparing the performance of this low-risk portfolio with a high-risk portfolio would be incongruous, as the objectives and risk profiles are diametrically opposed.

Scenario 2: The younger client, with a longer investment horizon and a higher risk tolerance, may have a portfolio skewed towards growth assets, such as equities, to capitalise on the potential for higher returns over time. While this portfolio might yield higher returns in the long run, it comes with increased short-term volatility, which would be unsuitable for the retiree.

These scenarios underscore the point that performance cannot be compared in isolation. It is client-driven, tailored to their specific circumstances, goals, and risk tolerance. 

The Reliability of Historical Performance as a Measure

It can also be misleading to base future outcomes solely on historical performance. While performance tests can provide valuable insights into a super fund’s past achievements, it does not guarantee future results. The level of risk taken by the fund is inherently relative to its performance.

A fund that has had high historical returns may have achieved them by taking on higher levels of risk. This level of risk may not align with every investor’s risk tolerance or financial goals.

The Importance of Professional Advice and Planning

When it comes to navigating the complex world of superannuation products, it’s important to take a meticulous approach and have a deep understanding of the financial landscape. Seeking professional advice and creating a solid financial plan can help you make informed and beneficial decisions.

At Wealth Architects, we believe in the significance of personalised advice that is tailored to your individual needs, risk tolerances, circumstances, and financial goals. Our approach goes beyond just looking at performance metrics; we delve into the intricacies of each super fund to ensure that our clients receive advice that is not only sound but also aligned with their life goals and financial aspirations.

Having a solid plan in place is like having a roadmap that guides you in your financial journey and helps you make decisions that are conducive to your long-term financial well-being.

Empowering Your Financial Journey: A Conclusive Insight

The APRA’s annual performance test is a crucial tool that promotes transparency and accountability in the superannuation sector. It provides valuable insights into the performance of super funds against set benchmarks. However, interpreting these results requires a discerning and informed approach. It’s essential to understand the comparison being made and to consider historical performance’s reliability as a measure for future outcomes.

At Wealth Architects, we guide our clients through the complexities of the superannuation landscape, ensuring they make well-informed decisions that align with their best financial interests. Professional advice and a solid financial plan are keystones for navigating the financial journey successfully.

By understanding the implications of the test results and making meaningful comparisons, individuals can secure their financial future and achieve their financial goals with confidence and peace of mind.

Are you ready to empower your financial future? Contact Wealth Architects today for personalised advice and insights tailored to your unique financial needs and goals. Let's build your financial roadmap together!



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