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The 'Contrast Principle' used by super fund test failures

Psychologists use the 'Contrast Principle' to explain how our perceptions are formed using comparisons. The Principle says perception is relative. That is, if we experience two similar things, the perception of one is influenced by the other.

In his book ‘Influence: The Psychology of Persuasion’, Robert Cialdini gives many examples of the way buyers are exploited using the Contrast Principle and clever sales techniques. Something can be made more attractive by comparing it to another choice that is less attractive. For example:

“It is more profitable for salespeople to present the expensive item first … presenting an inexpensive product first and following it with an expensive one makes the expensive item seem even more costly.”

Cialdini followed a real estate agent showing properties to potential buyers. The agent always started with a couple of undesirable properties, which he called ‘setups’.

“The company maintained an unappealing house or two on its lists at inflated prices. These houses were not intended to be sold to customers but only to be shown to them so that the genuine properties in the company’s inventory would benefit from the comparison.”

The agent watched the buyers’ ‘eyes light up’ when they saw the houses he wanted to sell after they had looked at the dumps.

The superannuation fund performance test

The Your Future, Your Super (YFYS) reforms are designed to improve outcomes for members. They feature a seven-year investment performance test for MySuper funds against a benchmark imposed by the Australian Prudential Regulation Authority (APRA).

(A point of detail on the regulations. The Australian Securities and Investment Commission (ASIC) is responsible for policy on communications and associated comparisons sent to members by funds. As ASIC advised me, "that they do so without hyperbole, fibbing, spin and general palaver". But the benchmarks and judgements are APRA's responsibility).

Last night (Wednesday, 13 October 2021), Senator Jane Hume, Minister for Superannuation, delivered a keynote address to the World Pensions Summit in the Hague where she described how 13 funds with 1.1 million members had underperformed, adding: "A bright-line test, with no excuses. A fund passes, or it fails."

Large super funds that failed the test are now applying a version of the Contrast Principle to explain the results to their members. Rather than compare performance against APRA's benchmark, they are using another measure such as a CPI+ or an absolute return target, with more favourable results.

They are correct to use this technique, as their funds have been managed in ways that differ from APRA's measurement. The performance test makes no judgement on the level of returns achieved, only the performance relative the underlying asset class benchmarks chosen by APRA.

Many of the failed funds have delivered returns better than their investment objectives, and yet they are judged as failures. It is possible for one fund to deliver 10% and fail, and another to return 5% and pass, which will confuse many fund members.

For example, a balanced fund may be managed with an investment target of CPI plus 3%, and with an allocation 50% to growth and 50% to defensive, it returned 15% last year, well ahead of its target. But it is benchmarked against a surging equity market with the S&P/ASX300 up 28% and S&P500 about 40% in FY21. It is deemed a failed fund because it was positioned at the defensive end of its asset allocation, which pushed its relative return 0.5% below its benchmark. Contrast this to a defensive fund invested in bonds which returned the same as its 5% benchmark. One fund is a fail at 15%, the other is a pass at 5%.

In explaining to members using a version of the Contrast Principle, it is better for the super fund to justify performance based on the long-term investment target rather than APRA’s benchmark comparison.

Examples of how underperforming funds are communicating

ASIC has warned fund underperformers against customising their communications. The regulator has provided a proforma letter which all underperforming funds must send to members. It is precise and critical, and here is an extract from the full ASIC letter.

ASIC’s Senior Executive for Superannuation, Jane Eccleston, added in a note:

“The text of the letter you send to beneficiaries is mandatory – don’t change it. Any communication you make in relation to the [annual performance assessment] or about your performance should provide information in a balanced and factual way that is not misleading and/or deceptive.”

Heavy stuff, writing to members that their fund has ‘performed poorly’ and they should consider moving their money. Surely, a self-respecting fund trustee would not leave it at that in any decent communication to members.

Well, they don’t.

a) Commonwealth Bank Group Super

The letter from the CEO of Commonwealth Bank Group Super, whose Balanced (MySuper) fund was designated as underperforming, included a two-page glossy cover note from which the following explanation is extracted, followed by a bland A4 version of the official ASIC document.

“We set out to achieve a certain (target) investment return above inflation. The rate of inflation used is the Consumer Price Index (CPI). Our objective is to achieve our target return during times of investment market ups and downs, we do not track an index or benchmark. This target informs how we invest.

Generally, we invest less in shares than many other super funds. Instead, we generally invest more in alternative investments and real assets such as property and infrastructure. This could mean that in strong share markets like we have seen in recent years, our Balanced (My Super) option returns will be lower than other MySuper products. The approach we take can be referred to as diversification. We expect diversification to produce more consistent returns, rather than relying on a smaller range of investments to perform well.

As at 30 June 2021, our Balanced (MySuper) option delivered an annual return of 15% and a long-term return of 7.3% pa over the last 10 years. This long-term return has exceeded our objective which is 2.5% above CPI over a 10-year period.

At the same time, it has also produced a smoother return experience for members compared to the average experience for other MySuper products.”

Fair enough. Get that: "we do not track an index or benchmark". I'll bet they do now, because the consequences of failing the test for a second year are too severe - the inability to accept new members.

Before we point a finger, who can claim if they were a trustee for this super fund, that they would argue against the emphasis on protecting capital with less volatility? It’s a valid defence. Then to top it off, the letter adds:

“To form a more holistic view of a MySuper product’s performance, there are other key areas, beyond net returns, that could be considered. Comprehensive evaluations carried out by industry rating agencies assess not just net returns but also insurance cover and premiums, education, advice, fund governance and more.”

b) Christian Super

Christian Super may be unique among funds, because it says:

“We believe that God invites us to put our faith into action with everything we do, including how we steward our members’ super.”

Fund managers need all the help they can get, and no doubt its Christian members support this principle. The super fund includes a Q&A section on its website dedicated to the performance test. Here are two relevant explanations.

“Why is Christian Super’s MySuper product labelled ‘underperforming’?

Christian Super has historically managed its investments to deliver the investment return objectives outlined in the Product Disclosure Statement. For our MySuper product (My Ethical Super), this objective was to achieve a 3% average annual return above inflation over 10 year periods, which the fund has over-achieved.

We have a more diverse range of members invested in our MySuper product than many other funds and have therefore historically taken a more defensive investment approach, which means we worked to minimise investment losses for our members and took less risk. This approach reflects risk-return investment theory and was made by analysing the way our members respond to market volatility. As well as this more defensive approach, there was also a degree of underperformance in some areas of our investment strategy, which we have addressed.

In response to the changing way that super funds are assessed by the regulator (APRA) in recent years, we increased the amount our MySuper product invests in riskier investments. As a result, we have delivered our investment return objectives, as well as meeting the new performance test benchmark requirements for the past two years ... 

How has Christian Super’s MySuper product performed compared to its stated investment objectives?

Our MySuper product (My Ethical Super) has consistently achieved its investment objective stated in our Product Disclosure Statement, delivering an average annual return of 7.95% each year over the last 10 years. This means that we’ve more than doubled our members’ money during the last 10 years through investment returns alone.”

There's an important highlight here. Christian Super has now invested more in riskier investments to meet the assessment test. That could come back to haunt trustees in a down market, when they supposedly thought the previous positioning was correct for their members.

But there's their version of the Contrast Principle in operation. Explain the results in terms of absolute returns rather than focussing on 'a degree of underperformance'.

c) BT Super 

BT Super offers lifecycle or lifestage funds where the defensive allocation increases with age. Younger members gain higher exposure to growth assets and are switched to defensive as they age. In FY21, the younger person's allocation achieved a highly-respectable return over 25% and yet they received a notice about their underperforming fund. No doubt totally confusing to many.

BT Super explains:

“For Lifestage products like those offered by BT, the annual performance assessment takes into account the asset-weighted performance of all Lifestage investment options collectively to calculate a single performance return. The combined seven-year performance of our BT Super MySuper product failed the annual performance assessment, and will be recorded as underperforming on the Australian Taxation Office (ATO)’s YourSuper comparison tool at”

The asset allocation of the four Lifestage funds are radically different, as shown below, for people born in the 1940s, 1950s and 1960s, versus those born after the 1970s. BT’s challenge is to explain how APRA has judged all these against one asset-weighted benchmark, especially when people are ringing up the call centre asking how their failed fund earned 25%.

And what is BT Super saying in response to failing the test? What everyone else is saying ... nothing to see here:

“We have worked hard and invested heavily to improve member outcomes and are seeing the result of this in our recent performance.

We’ll continue to look for ways to provide better performance outcomes for our members, be it reviewing our investment strategies, our fees, or our services. In addition, over the past five years we’ve also enhanced our member tools, educational offering and digital experience to make it easier for our members to understand and manage their super.”

Will it work?

It's the early days of so-called underperforming funds writing to their members, and (to my knowledge) no information is publicly available on fund losses. It's my guess the amounts will not be high, as many people in MySuper funds are disengaged and do not even open their mail. Then relatively few will change in light of the alternative explanations.

As Robert Cialdini says of the Contrast Principle:

"An advantage of employing this lever of influence is that its tactical use typically goes unrecognised."


Graham Hand is Managing Editor of Firstlinks. This article is general information.


October 20, 2021

A compelling read.

The Fund Management Industry has solved this measurement and KPI issue including ‘survivor bias’ and its time Super did the same. Bad measurement, leading to wrong incentives to increase retirement balances.

These Funds need to take into account well-designed smart default tailoring, offered by @TTS and the Funds own member demographics. The government enquiry into superannuation found this well-designed tailoring using individual factors was a better approach. It is far more important to retirement balances to be in a better investment option than to move to another fund.

The longer this PTEST only approach continues the more ridiculous it looks. Some failing funds only have a very small percentage of members that have been there for over 5 years and their past 3 year returns have shot the lights out. Yet all members got the 'bad' letter, surely that's misleading the majority! Further what of Colonial First State, appointing BlackRock - if the fund fails again and stops taking in members is APRA saying Blackrock and the indexing isn't up to it?

October 17, 2021

This article really does make the APRA test seem unfair and absurd. How can a BT fund that returns 25% in a year be labelled as a failure? As I commented last week, even Warren Buffett would fail the APRA test as he has underperformed the US market by 3.5% pa over the last seven years. This assumes that APRA would assign the S&P 500 total return index as Buffett's benchmark. And this gets to the point; we need to know exactly how APRA assigns the benchmarks for its comparisons. Someone needs to ring up APRA and get an explanation because I haven't seen it so far. Also we need an explanation for what account APRA takes of all the other factors that go into providing a super fund service such as low volatility, standards of service, low risk and even ethical investing if you are that way inclined. I for one would accept a slightly lower return if the standard of service is superior to other funds. There is nothing more frustrating than dealing with an incompetent service provider where you can't talk to somebody about your problem. All in all, it seems that the APRA test is simply not fit for purpose and should be abandoned. The regulators are trying too hard to protect people. They have also not taken into account the fact that it is often better to buy the underperforming funds as they are more likely to outperform over the next few years. Where are the studies from APRA that show that underperformance is a reliable indicator of future underperformance? In fact the government insists that all financial advisers declare that past performance is no indicator of future performance. Can someone please ask the government how it justifies this inconsistency?

October 18, 2021

BT got canned because they run 7 different decade based risk adjusted "lifestage" funds in their MySuper portfolio from 1940s to 2000s, and APRA decided to run an average across all 7 instead of evaluating them separately. End result will probably be closure of the lot to new investors. Ridiculous.

October 17, 2021

Sadly the current Government hates super because it was an ALP invention. The absurdity of this test also shows that APRA does not understand the investment process for super funds.

October 16, 2021

"Many of the failed funds have delivered returns better than their investment objectives, and yet they are judged as failures. It is possible for one fund to deliver 10% and fail, and another to return 5% and pass, which will confuse many fund members.". What's wrong with that? An equity fund that delivered 10% over the last year deserves to fail whilst a bond fund that delivered 5% deserves to pass. Surely the risk adjusted return is the relevant measure – which seems to be what APRA's measurement is attempting to do.

October 14, 2021

Never accept simplicity if complexity is available!

Performance measurement is there to serve two purposes:
1] Is the Fund "on track" to hit it's long term objectives? Typically CPI +4/5% is the measure used and it is a good one, as a proxy for long term returns.
2] Has the Fund Manager added value over the "Index", including their fees? That requires a benchmark of some sort and that is where it gets messy as every Fund will claim their benchmark needs to be different as their Asset Allocation is different. Fair point, however it simply confuses the average investor.

It would be relatively easy to construct some "Standard Benchmarks" for say Balanced/Growth/Conservative/Income etc, however if you do that, every Manager would just hug their benchmark - no creativity, no under performance and no out performance

My personal measurement for a heavy equity bias Fund, is CPI +5% PLUS against the All Ords - dead simple, beat both, sleep easy! Everything else, to me, is noise and waffle - I know, I used to write it!

October 14, 2021

ASIC and Jane Hume show no signs of stepping back on this, even when a fund does well for its investors (up 25%!!!). Imagine apologising for that and calling it a poor performer.

October 14, 2021

One main issue with the reporting framework for all public offer SFs is that they do not comply with accounting standards, and as far as I am aware the SF trustees of said SFs have been fighting to stop this from happening.



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