The Association of Superannuation Funds of Australia (ASFA) and the Financial Services Council (FSC) have launched industry guidelines on investment risk for inclusion in product disclosure statements (PDS).
The associations have proposed the use of seven risk categories ranging from very low to very high, depending on the average number of years an investment is expected to have negative annual returns over a 20-year period.
The most risky category reflects the estimation that the returns could be negative for six years or more, while the least risky category estimates a negative return of less than half a year.
From June next year, the Australian Prudential Regulation Authority (APRA) will require superannuation funds to identify and disclose the risk of negative returns on a standardised basis.
ASFA chief executive Pauline Vamos said the new guidelines would help fund managers to comply and bring more transparency for consumers.
"The release of this guidance paper is a key part of the increased transparency in 'true to label' reporting that consumers will see from the current superannuation reform process," Vamos said.
Although the guidelines were initially developed for super funds, the risk categories could be applied to most managed funds, according to ASFA policy general manager David Graus.
Graus said the categories would initially be used in PDSs, but were also likely to be adopted by research houses.
"At this stage, the only mandatory disclosure will be in PDSs, but we do expect rating houses to use these categories, amongst other things, when they are comparing returns," he said.
Morningstar chief executive Anthony Serhan was part of the joint working group, formed by ASFA and FSC, that developed the guidelines, and he said Morningstar was planning to include the new risk measures in its research.
"We will be collecting and storing this new measure in our database and will be incorporating it into our fund profiles and screening tools as more and more funds publish the statistic," Serhan said.
"This statistic will be useful in identifying strategies that may appear similar on the surface, but where the trustees' expectation of future risk is different."
But he said the research house would continue to classify funds based on its existing categorisation system, which focused on the underlying holdings of funds.
"It is only one measure of risk and whilst a useful starting point, there are other issues that investors should continue to consider," he said.
SunSuper chief investment officer David Hartley said the new categories could place too much emphasis on risk, when the focus should be more on investment objectives.
"If you start focusing on the risk profiles or risk as the primary element on which to choose your option, then I think you've got it around the wrong way," Hartley said.
"You really need to look at your needs and then adjust the risk profile of a particular product as a descriptor as opposed to the primary driver of which option to pick, because nobody says 'I want the most risky option'; that is not the way people think."
Graus acknowledged risk should not be the primary focus in investment decisions.
"These [risk categories] will be disclosed next to potential performance objectives," he said.
"If you are going to have a high performance objective, you're going to have a higher level of risk, that is the expectation."
APRA and ASIC have welcomed the risk standards.
"The standard risk measure is a useful tool for both consumers and industry," ASIC chairman Greg Medcraft said.
"It will help people to understand the risks in superannuation and make confident and informed decisions.
"It will also provide the industry with a standard risk measure to use when calculating risk and help these important gatekeepers make disclosures to members."
The start date for disclosing risk on a standardised basis is 22 June 2012, when the government's shorter PDS regime will also come into force.
