The Australian Prudential Regulation Authority (APRA), since introducing the test in 2021, has observed a significant decline in membership of underperforming products—from 1 million to 8,500 members—demonstrating progress. APRA's deputy chair, Margaret Cole, acknowledged this advancement but the performance test's application has garnered criticism for its potential unintended consequences.
Among the underperformers were three capital guaranteed products from AMP, whose inclusion raises questions about their classification. Many investors were likely advised into these products based on their financial needs, expecting stability rather than high yields. The sudden reclassification as underperforming prompts investors—and their advisers—to reconsider their strategies amid fears of capital gains tax implications should they choose to divest as per APRA's suggestion.
The performance test also applies a uniform benchmark fee for a $50,000 balance, misrepresentative for products typically part of larger investment portfolios, like those averaging $250,000. In these cases, products serve distinct purposes, such as capital preservation, making the test's one-size-fits-all approach poorly suited for evaluating their effectiveness.
Moreover, Insignia and AMP dominate the platform TDP market, with 65 per cent of offerings, but the test scrutinises only a small fraction of platform products. Despite its intent to shield members from persistently underperforming funds, the test may inadvertently harm those it aims to protect, without addressing larger systemic issues, like herding behaviour around certain asset classes.
With the Treasury preparing another review, there’s a pressing need to reconsider the test's broad impacts on the industry. The performance test must evolve beyond its current scope, factoring in the nuances of investment types and the broader market context, to ensure it genuinely benefits superannuation members and addresses contemporary challenges. Without comprehensive reform, stakeholders may continue facing convoluted outcomes, diminishing the test’s original purpose.
