The U.K. pensions watchdog is weighing an industry performance test that’s similar to a metric used in Australia to weed out underperforming funds.
The Pensions Regulator is looking into the advantages and disadvantages of the Australian model, an annual test using benchmarks designed to measure the investment performance of funds and clamp down on excessive fees.
“Australia obviously put that in place to drive outcomes and they felt that was a good thing to do and we’re in a position where we might want to do that,” Neil Bull, head of investment at the Pensions Regulator, said in an interview.
Dozens of Australian pension products have failed the test since it was introduced in 2021 and it’s become a key monitoring tool for both the regulator and workers in the nation’s A$3.6 trillion ($2.4 trillion) retirement industry, known as superannuation. Funds offering products that fail must notify their members, while products that fall short two years in a row are barred from accepting new members.
Bull said the British regulator was looking at issues ranging from the time period Australia used, to the benchmarks that helped to assess performance.
“We haven’t kind of got the answers to those questions yet,” he said, adding the watchdog wanted to learn from Australia and other countries as to what might be put in place. “As soon as you say you are a regulator focused on outcomes, it’s not a huge step from that point to focus on things like performance tests.”
The Australian government is currently consulting over potential improvements to its test and released a discussion paper earlier this month. It acknowledged concerns by some in the industry that it is a “blunt tool” and canvassed criticisms of the system, including that the test encourages short-term decision making and provides an incentive to hug benchmarks.
The Australian Prudential and Regulation Authority, which has oversight of the test, has also pressured the industry to consolidate. A recent report by Mercer forecast the number of Australian funds will shrink as smaller and underperforming funds merge. Bull said the U.K. was going through a similar wave of consolidation.
