The Association of Superannuation Funds of Australia (ASFA) has urged for a reevaluation of the annual performance benchmarking system for superannuation funds. It argues that the current framework is hindering investments essential for Australia’s transition to net zero emissions. This appeal comes as Treasurer Jim Chalmers prepares for a three-day Economic Reform Roundtable scheduled from August 19 to 22, 2024.
In a paper released ahead of the roundtable, ASFA highlighted that the stringent performance tests discourage superannuation funds from investing in crucial sectors, particularly renewable energy. Since reforms introduced by the previous Coalition government in 2021, funds have been publicly evaluated against various benchmarks, including share markets and bonds, over an eight-year period. Funds that consistently underperform face severe consequences, such as being barred from accepting new members.
The Australian Financial Review reported that many superannuation funds have adjusted their investment strategies in response to these performance metrics, often reducing their exposure to potentially lucrative sectors. This adaptation is seen as detrimental to the broader goals of sustainability and productivity.
The Albanese government has encouraged superannuation funds to take a leading role in the transition to net zero as part of its Future Made in Australia policy. This includes investments aimed at boosting housing and enhancing trade relationships with countries such as Indonesia.
Performance Tests as a Barrier to Investment
Mary Delahunty, ASFA’s Chief Executive, stated that changes to the performance testing framework may be necessary to facilitate the investments the government is advocating for. She noted that the current system favors asset classes that are easier to benchmark, such as listed equities. Delahunty emphasized, “It’s in these asset classes that the biggest leaps in productivity could be realised, but super funds need to know they don’t risk falling afoul of shorter horizon performance requirements.”
ASFA’s paper identified performance benchmarks as a significant obstacle to investing in projects that could enhance resilience and productivity. The organization explained that by measuring current performance against historical benchmarks, renewable energy projects are unfairly compared to fossil fuel investments. This approach favors conventional energy generation, making it challenging for funds to allocate resources toward the energy transition without incurring tracking-error risks.
Delahunty projected that to meet the demands of transitioning to net zero emissions, new fixed capital investments would need to increase by approximately 5 percent beyond current business-as-usual levels over the next three decades. She also advocated for less stringent reporting rules for funds investing in residential properties, arguing that the Australian Securities and Investments Commission (ASIC) should ease its scrutiny of private markets.
Government’s Open Mindedness and Sector Pushback
The Albanese government has indicated a willingness to consider overhauling the existing performance benchmarking system. While there is openness to change, some sector representatives, including former ASIC Deputy Chairwoman Karen Chester, have expressed skepticism about the claims that performance tests hinder valuable investments. Chester remarked, “To date, no concrete evidence has emerged to substantiate the claims that the performance test impedes worthy investments, ‘green’ or otherwise.”
As discussions continue, the superannuation sector remains hopeful that reforms will balance the necessity for strong performance with the urgent need for investments that support Australia’s long-term sustainability goals. The outcome of the Economic Reform Roundtable could significantly influence the trajectory of superannuation investments in the coming years.
