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The risk of Your Future Your Super underperformance

Retirement
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By Tim Unger, FIA | July 5, 2021

How likely are superannuation funds to fail the YFYS annual performance test and how can they assess their risk of future underperformance?

The new Your Future Your Super annual performance test is effectively checking the efficacy of a superannuation fund’s investment implementation (i.e. returns relative to the YFYS benchmark). This makes details of the modelling assumptions used very important – arguably even more so than for portfolio construction purposes, where total portfolio risk and return outcomes are the main focus.

This article by Tim Unger assesses the risk of future underperformance, timing and sequencing considerations and their probable impacts when taking a longer-term view.

Our initial analysis of a subset of MySuper options suggests a typical forward-looking probability of failing the performance test over a single eight-year period falls in the range of 10-15% but we go beyond this timeframe. The likelihood of failing the test over a single eight-year period is a useful starting point, but it doesn’t accurately represent the likely prospect of the fund failing the performance test over a longer time period. Part of the challenge of assessing this risk is the rolling annual nature of the test.

A product with a 10% probability of underperformance in any given eight-year period has a cumulative probability of underperformance over a 17 year time period of around 35%.

Because of the increased probability of failing the test when assessed over a longer time period, funds will need to pay a lot of attention to how much risk they are taking relative to the YFYS benchmark.

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Senior Director, Investments

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