CEM Benchmarking research queries the standards of superannuation

A report by CEM Benchmarking (CEM), one of the world’s most authoritative pension fund researchers, reveals the effectiveness of the “Your Fund, Your Super” (YFYS) test when applied against a global set of large institutional investors over a nearly 30-year period.

What is the purpose of YFYS test?

The test, first administered to Aussie superannuation funds in 2021 by the Australian Prudential Regulation Authority (APRA), poses an existential threat to any fund that fails the test two years in a row. With the results of the second test coming in a few months, this study helps answer questions about the tests ability to identify poor-performing funds.

“In the competitive Australian superannuation market, the YFYS test will come under attack by those that fail. Our 30 years, 1000+ database of pension assets is positioned to answer questions of test efficacy, persistence of failure, and features of funds that fail the test” said Dr. Alexander D. Beath, senior research analyst at CEM and lead author of the study.

“Obviously, if you’ve had poor results in the past, the test will pick up on that. More important is the fact that the test picks up on funds that do poorly in the future, which the YFYS test does” added Beath. CEM found that the test has efficacy, and that over long periods the test preferentially picks out funds that not only performed poorly in the past, but that performed poorly in the future as well, a key feature of good performance test.

What were the findings of the CEM study?

Research findings include:

  • Over a 7-year time frame, 14% of investors can be expected to fail the test in any one-year time frame. Over an 8-year time frame, the fraction decreases to 12%.
  • The research also found that failure is persistent; if you fail the test in a 7-year window, the likelihood of failing the next year in an 8-year window is 77%.
  • The research also found that the test can help improve system-level outcomes. Removing investors that fail consecutive tests would have improved future net value added across the remaining funds by 0.08% over the past decade (2011-2020), equivalent to an additional A$2.7 billion of additional assets with which to finance pensions.
  • Funds that tend to fail the test more frequently tend to be smaller. Funds that outsource a greater share of their investment activities, and funds that incur higher investment costs.

The full report can be accessed here.