Context: The benchmark that moved the market

Australia’s Your Future, Your Super (YFYS) performance test compares each super option’s net returns against a reference portfolio derived from asset-class benchmarks over an eight-year window. Fail by 50 basis points or more and the product must notify members; fail twice and it closes to new money. While the methodology improved transparency and member outcomes, it also introduced powerful incentives that rippled through asset allocation, product design and cost structures.

The latest test results reignited concerns from funds and independent experts about unintended consequences—especially the disincentive to allocate to long-duration or emerging sectors that may not track the benchmark closely in the short to medium term. In response, the federal government has announced a formal review to identify and remove barriers that may limit investment in national priorities such as housing and renewable energy. The agenda has shifted from whether the test works to how it can work better.

Decision: Treat the test as a design constraint, not a compliance chore

Leading funds reframed the test from a box-ticking exercise to a core design constraint alongside liquidity, valuation discipline and long-term risk. This pivot addressed four strategic questions:

• Business impact: How do we deliver net-of-fee outperformance when measured against an explicit benchmark, without sacrificing long-horizon returns?
• Competitive advantage: Can we exploit tracking error intelligently—running “near-benchmark” in public markets while reserving active risk budget for high-conviction, scalable private assets?
• Implementation reality: What must change in portfolio construction, cost management and data systems to manage to the test daily, not annually?
• Future outlook: How could a reviewed test alter benchmarks, lookback periods or risk adjustments, and how do we pre-position?

Implementation: The operating model behind passing—and winning

Funds that built durable advantage under the test made five operational shifts:

1. Dual-lens portfolio construction. Every investment decision is assessed under two lenses: (1) long-term total returns; and (2) YFYS benchmark relative performance and tracking error. CIOs introduced position-sizing guardrails that cap benchmark-relative risk in listed equities and fixed income, while allocating active risk to where the expected alpha per basis point of tracking error is highest.
2. Cost-to-alpha discipline. With performance measured net of administration and investment fees, funds launched procurement resets and index implementation upgrades. Common moves included transition to lower-cost index mandates, securities lending income, and internalisation of factor sleeves. For many options, shaving 5–10 bps from implementation costs is equivalent to a year’s worth of alpha in efficient markets.
3. Private markets recalibration. Unlisted assets remain strategic, but pacing and valuation governance tightened. Funds prioritised brown-to-green infrastructure, core-plus real estate with inflation linkage, and operating renewables with contracted revenues—assets whose cashflow resilience is easier to evidence under the test’s measurement cadence.
4. Product rationalisation and M&A. Underperforming or subscale options were closed or merged, reducing duplicative cost. The sector’s consolidation wave—producing mega-funds such as Australian Retirement Trust and scaled platforms at AustralianSuper and Aware Super—has been accelerated by the test’s economics of scale.
5. Data, risk and member communications. Daily benchmark-relative dashboards, enhanced SAA/TAA attribution, and member-friendly explanations of performance versus benchmark became baseline. The goal: fewer surprises, faster course correction and clearer accountability.

Results: What changed—in numbers and behaviour

While APRA’s early rounds flagged sizable underperformance in some MySuper offerings, the number of failing MySuper products has fallen materially since the test’s inception in 2021, even as the regime expanded to Choice options where failure rates were initially higher. The market response has been tangible:

• Fee compression: MySuper administration and investment costs have continued to trend down by multiple basis points since 2021, reflecting scale benefits and sharper procurement—directly improving net member returns.
• Scale and resilience: A series of mergers has created funds with >A$100bn–A$300bn in FUM, unlocking lower unit costs, broader internal capabilities and deeper co-investment access.
• Sharpened liquid-market efficiency: Many options have reduced unintended style bets and minimised tracking error in listed exposures, reallocating risk budget to high-conviction areas where information advantages are more durable.
• Portfolio liquidity and governance: More disciplined liquidity ladders and valuation oversight, especially for unlisted assets, reduced the risk of benchmark-relative drawdown surprises.

The behavioural result is more predictable performance relative to the test, with fewer “left-tail” outcomes. At the same time, critics argue that benchmark pressure can nudge portfolios towards “benchmark hugging” unless offset by disciplined active risk budgeting.

Technical deep dive: How the test drives decisions

The YFYS test assigns each option an asset-class mix and compares net performance against reference indices, over an expanding window up to eight years. Underperformance of 50 bps or more constitutes a fail. Because the reference portfolio is transparent, the test effectively prices tracking error. Practical implications include:

• Time horizon friction: Investments with J-curve effects (greenfield infrastructure, early-stage renewables, emerging managers) can struggle to keep pace over shorter windows.
• Valuation cadence: Infrequent valuation of unlisted assets can produce timing mismatches versus listed benchmarks unless governance is robust.
• Cost asymmetry: Every basis point of fee is a permanent drag against a benchmark that assumes low-cost exposure.

Market context and policy direction: What a review could change

The government’s review—framed around enabling capital for housing and the energy transition—could refine benchmarks, extend lookback periods, or introduce risk-sensitive adjustments that recognise genuine diversification and long-duration value creation. Industry submissions (including from large industry funds that have advocated reform) highlight opportunities to:

• Recognise the role of unlisted and nation-building assets through more calibrated risk treatment and valuation guidance.
• Reduce cliff effects from a single pass/fail line via confidence intervals or traffic-light gradings.
• Maintain pressure on underperformers while avoiding incentives that homogenise portfolios.

Globally, the direction of travel is consistent: the UK’s emerging Value for Money framework and heightened fiduciary scrutiny in the US both push for clearer member outcomes, lower costs and transparent benchmarking. Australia remains at the frontier—its choices now will shape global practice.

Lessons: A playbook for boards and CIOs

1. Run a two-speed investment engine. Keep listed exposures near the benchmark to preserve test certainty; concentrate active risk where conviction and structural edges are strongest.
2. Industrialise cost advantage. A perpetual 5–10 bps cost edge compounds meaningfully. Treat fees as design choices—internalise where scale and capability warrant, outsource ruthlessly where they do not.
3. Institutionalise liquidity and valuation governance. Align pacing, revaluation frequency and disclosure with the test cycle to avoid avoidable tracking-error penalties.
4. Rationalise product shelves. Prune subscale or overlapping options; where member interests are better served, pursue mergers to unlock scale economics.
5. Pre-position for reform. Scenario-test portfolios under plausible review outcomes (longer lookback, risk adjustments, revised benchmarks). Build optionality in housing and renewables pipelines so capital can ramp quickly if constraints ease.

The performance test has already lifted the floor on member outcomes. The next frontier is lifting the ceiling—rewarding funds that can deliver long-horizon value without tripping short-horizon constraints. Early movers that embed the test into their operating system will not just pass; they’ll outperform.