When we rate pension funds, we apply a methodology that was first developed in 1997 and has been continuously refined ever since. We focus on five main criteria: organisation, investments, member services, fees, and administration.
We determine a score for each of the main criteria and then weight these to provide an overall rating for the fund. Chart 1 show the main criteria and the weights we assign to them.
In the following sections we look at each of the main criteria in turn, starting with the most important, and explain the sub-criteria we assess.
Investments are obviously important and account for 40% of our overall rating for pension members. When we rate a fund's investments, we do not focus on past returns. Rather, we focus on assessing the quality of the fund's investment governance, its in-house investment team, its external asset consultant (particularly for research), and the structure of its investment portfolios. If it does these things well, it is likely to have strong, long-term performance.
Most funds offer a range of investment options to choose from, but we concentrate our research mostly on the multi-manager options because that is where most members are invested. Chart 2 shows what we take into account. It is worth noting that past performance only accounts for 15% of the total score for investments (which equates to 6% of our overall fund evaluation).
While investments carry the highest weighting in our ratings process, we believe member services are also vitally important for pension members. For that reason they account for 25% of our overall weighting.
The best funds offer services that help their pension members to (i) understand the options they have in retirement and (ii) arrange their super to give them the income they require, while providing some capital growth to make it last as long as possible. Retirees need to be able to model different scenarios to see the effect on their pension balance of different investment choices and drawdown strategies. They also need to be able to take into account any Age Pension they may be entitled to, either now or in the future.
Members need help in various forms to meet all of these needs. The main aspects that we focus on when rating a fund on member services are education (public website and secure website), communication materials (member statements and newsletters), and financial advice services. Chart 3 shows those sub-criteria and the weightings we assign to them.
The fees that a member pays – either directly from their account or indirectly through their investments – have a bearing on how much income they end up with and how long their money lasts. However, a low fee fund is not necessarily the best. A fund may be cheap because its investments use a lot of passive management, or it may cut costs by providing little in the way of member services.
When we assess a fund on fees, we look not only at the costs that the member pays, directly or indirectly, but also on how clearly and completely the fund discloses those costs, as shown in Chart 4.
For a fund to deliver high quality services to its members, it needs to have efficient administration. There is a range of factors we focus on when we assess a fund's administration, including the quality of its record keeping system and workflow management, and its ability to meet realistic service standards. These are shown in Chart 5.
Australian super funds are highly regulated and they are not geared, so the chance of failure is quite remote. Nevertheless, it is important to know that the organisation behind the fund has the capacity to sustain and improve it now and into the future.
When we assess a fund on organisation, we look at who owns or controls it, the strength of its management team and its strategy for the future, as shown in Chart 6.