You might have heard recently about a ‘superannuation heatmap’ published by the Australian Prudential Regulation Authority (APRA), that exposes underperforming super products. But what is it, how does it work and what information can you take from it?
APRA, which is a watchdog for the financial sector, has published its first super heatmap, in which it assesses all 94 MySuper products currently on the market, to provide super fund members with clearer view of how well their money is being put to work. (MySuper products are the simple, cheaper super fund products that employers place super contributions in when an employee doesn’t select a specific fund.)
Through a colour grading scheme, the heatmap publicly compares the performance of MySuper products – a comparison that APRA Deputy Chair Helen Rowell says is designed to make underperforming funds accountable and shine a light on opaque business structures.
“Australia’s superannuation system delivers sound outcomes for most members, but APRA is determined to weed out the industry’s underperforming tail,” Rowell says.
Funds with the worst-performing products had already been contacted by APRA with requests for an action plan that shows solutions to the weaknesses the regulator identified.
“If they are unable to make substantial improvements in good time, we will consider other options, including pressuring them to consider a merger or exit the industry,” Rowell explains of APRA’s next move.
The colour gradient on the heatmap ranges from white (a product that is performing at or above predetermined acceptable benchmarks), to pale yellow and all the way through to burnt red (for the worst-performing funds).
The heatmap assesses products on three criteria – investment performance, fees and costs and sustainability of member outcomes – and doesn’t give an overall ‘colour’ to rank one product over another. This was done to acknowledge the complexity of super products and ensure that no product provider can be complacent about specific shortcomings in their products.
When separating out products based on the criteria, the worst-performing products for average annual compound returns included:
The funds with the worst fee disclosure for $50,000 account balances included:
And the least sustainable funds due to reducing member numbers and net cash outflows included:
MySuper products offer two investment strategies, both of which were evaluated in the heatmap. The most common strategy is a single diversified investment that offers a mix of investments that stay the same over time, and the less common one is a lifecycle strategy that shifts from growth investments to more conservative investments as the employee ages.
The funds that provide a single diversified investment strategy option that scored average or above across all categories included:
And those offering the best lifecycle products were:
Naming and shaming funds that may have previously flown under the radar is just the start of APRA’s crackdown, Rowell says; funds with burnt-red products will also be subjected to more intense regulatory supervision.
“This is a game changer for the superannuation industry,” she says. “The heatmap will subject trustees to a new level of scrutiny, and it’s understandable that some in the industry feel uncomfortable.”
The heatmap will be updated by APRA at least annually going, but to show super product owners what early improvements had been achieved, the first update will be published in in six months’ time. The complete map can be downloaded from APRA here.