Peer Intelligence | Summer 2022

By Chris Flynn

Last month, we released the paper, What is the value of the Your Future, Your Super test?  The paper demonstrates how CEM’s data can be used not only to calibrate a test or metric (e.g. answering questions like, ‘what has average top quartile rolling 4-year value added been?’) but also to test whether success on the metric is useful as a predictor of future outperformance.  The conclusion? Removing global funds who had failed the test from the CEM universe in earlier years would have boosted average net value added in the following years by eight basis points (bps).   

The “Your Future, Your Super” (YFYS) is an annual performance test performed by the Australian Prudential Regulation Authority (APRA) on MySuper products (the default, defined contribution superannuation products offered by the funds to their members). Last year’s test required the funds to have a net value add (NVA) above negative 0.5% over a rolling seven-year period, and this year’s test will have the same target, over an eight-year period. Those funds that fail the test are required to inform their members. If they fail for two years in a row, they are no longer allowed to accept new members into their plan. 

While the test is new, CEM applied the YFYS test retrospectively to its historical global pension database from 1992 to 2020, answering two questions in the process.  First: how many global funds would have failed the test? Second: would removing those funds who failed a test from the universe improve the average performance going forward? 

We found that 14% of global peers would have failed over any given seven-year window.  Twelve percent would fail over an 8-year time frame.  When funds fail on a seven-year window, over three quarters fail the eight-year test the following year, while just under a quarter (23%) have a strong enough eighth year to pass the subsequent eight-year test. This isn’t very surprising – if the average performance on the first seven years is significantly below the threshold, the eighth year would need to be very strong to offset those earlier years.  

For funds that failed the eight-year test, the team removed them from the universe beyond the year in which they failed to test their impact on average universe performance. By removing those funds who failed earlier tests, average universe net value added for the past decade would rise by 8 basis points from 0.22% to 0.30%. To put this into context, the entire Australian superannuation market was worth A$3.4 trillion in September 2021.  An eight basis point improvement in performance would generate an additional A$2.7 billion in assets in its first year alone, an amount that would grow with compounding. 

Institutions and their stakeholders have any number of KPIs or targets they might measure or tie outcomes to.  Should organizations focus on avoiding negative outcomes over a cycle, like the APRA test? What about striving to achieve top-quartile results over as many four-year rolling periods as possible?  Is peak long-term performance based on having positive value added more often, or perhaps on having huge positive value added once or twice per economic cycle?  Testing potential measures against CEM’s universe of historical results can give insight as to which short-term targets are more likely to be linked with true, long-term success. 

To discuss how CEM can help your organization set appropriate levels for targets or KPIs, or more broadly test potential targets’ association with long term outperformance, contact either your relationship manager or Chris Flynn, Product Manager, Custom Research.