How likely is a super fund to fail YFYS test?
The average super fund has a 10-15% chance of failing the Your Future, Your Super performance test in any given eight-year period, but some may need to dive a little deeper to determine how at-risk they are, Willis Towers Watson says. Following analysis, WTW senior director of investments Tim Unger said a product with a 10% probability of underperformance in any eight-year period has a cumulative probability of underperformance over a 17-year period of about 35%. Unger looked at two hypothetical super products which performed broadly in line with the YFYS benchmark in a cumulative sense in the seven years to 2021 but had different pathways of returns. If Fund A outperformed in 2015 and 2016 but had poor performance in more recent years, come 2023 and 2024 it will have a heightened risk of failure as those strong returns drop out of the rolling eight-year period. Likewise, if Fund B did well in 2016 and 2018 but poorly in 2017 and 2019, its risk of failure spikes in 2024 and 2026 when the positive impact of those earlier years is lost. "If we look at 10 consecutive performance tests, which cover a total of 17 years of fund performance (i.e. the first test covers years one to eight, the second covers years two to nine, while the 10th test covers years 10-17), a product with a 10% probability of underperformance in any given eight-year period has a cumulative probability of underperformance over the 17 years of around 35%," Unger's note reads. "If we extend this to 20 measurement periods, then the cumulative probability increases to a little over 50%." This shows that a fund with a 10% chance of failure over an eight-year period is more likely than not to fail when extended to 20 measurement periods, he said. "We estimate that a product with a 10% probability of failing the test over a single eight-year period has around a 7% probability of failing it over any two consecutive such periods," Unger said. "However, once again if we extend the assessment period to include 25 measurement periods, the likelihood of failing the test in two consecutive years is over 40%, which is clearly a very significant risk for a fund." Even a fund with a 5% chance of failure over eight years has a 40% chance of underperformance over 25 periods, and around a one in four chance of consecutive failures. "All of this suggests that funds will need to pay a lot of attention to how much risk they are taking relative to the YFYS benchmark," Unger said. The initial findings over an eight-year period looked at current strategic asset allocations and assumed administration and advice fees in line with the MySuper median fee.