Case Study: APRA’s Superannuation Performance Test – From blunt instrument to smarter accountability?

Context: A powerful lever with unintended consequences

Since 2021, the Your Future, Your Super (YFYS) performance test has been the most consequential piece of prudential engineering in Australian retirement savings. It compares a fund’s net returns against a reference portfolio built from asset-class benchmarks anchored to the fund’s stated strategic asset allocation (SAA), with a tolerance of around 0.5 percentage points per annum over an eight-year horizon. Products that underperform must notify members and face commercial pressure; persistent failure is effectively a licence to exit.

Its bite is real. In the inaugural 2021 round, 13 of 76 MySuper products failed, catalysing exits and mergers. By 2023, only one MySuper product failed, but the expansion to trustee-directed products (TDPs) saw roughly 12 per cent (96 of around 805) fail, underscoring the test’s reach. The system—now roughly $3.8–$3.9 trillion in assets—has clearly shifted behaviour. Treasury previously estimated YFYS reforms could deliver member benefits in the tens of billions over the decade, driven by transparency, consolidation, and fee discipline.

Yet the market signal has side effects. Funds argue the methodology biases against unlisted and greenfield assets—exactly the places government wants more capital: housing, energy transition, and productivity-enhancing infrastructure. The latest results surfaced the same tension: accountability versus flexibility.

Decision: The government opens the door to recalibration

Following the 2025 performance test cycle, the Treasurer flagged a review aimed at removing “unnecessary obstacles” that deter long-horizon investment—particularly in housing. Industry bodies are broadly aligned on the direction of travel: keep the discipline, update the design. Associations representing funds and investment managers have called for longer lookback periods, better-matched benchmarks for unlisted assets, and more nuanced risk measures that reduce the incentive to hug indices.

APRA, for its part, remains focused on member outcomes and comparability. The regulator’s stance has consistently emphasised that any recalibration must not weaken consumer protection or dilute the pressure on chronic underperformance. The policy challenge is a classic regulatory design problem: avoid Goodhart’s Law (when a measure becomes a target, it ceases to be a good measure) without losing the test’s market-cleaning potency.

Implementation: What changes are on the table (and what it will take to execute)

Technical options under discussion include:

• Benchmark refinement: Replace listed proxies for unlisted property and infrastructure with blended indices or factor-based benchmarks that better match risk/illiquidity. Introduce lifecycle cohort benchmarks that reflect member age profiles.
• Time horizon and persistence: Extend to a rolling 10–12-year window and incorporate failure persistence to separate cyclical underperformance from structural issues.
• Risk-adjusted overlays: Complement the headline test with a small set of risk metrics (e.g., tracking error bands, drawdown, and volatility-adjusted returns) to discourage benchmark-hugging.
• Quality-of-service dimension: Borrow from UK “Value for Money” reforms by explicitly weighing net returns alongside fees, service quality, and member outcomes.

Execution will not be trivial. Trustees will need improved data quality and valuation frequency for unlisted assets, look-through reporting for complex vehicles, and upgraded risk systems to monitor active risk budgets and liquidity stress. Asset owners will have to recalibrate their SAA, strengthen valuation governance, and document investment beliefs that justify prudent deviations from the reference portfolio.

Results to date: Measurable shifts in behaviour and market structure

Even in its current form, the test has delivered concrete outcomes:

• Product rationalisation: The initial wave of failures triggered closures and mergers, reducing duplication and lifting average scale—a driver of lower unit costs.
• Fee and return discipline: Successive test cycles have normalised peer comparison on net returns and costs. Funds that previously underperformed have been forced to reset risk budgets, renegotiate mandates, and exit high-fee, low-value strategies.
• Portfolio homogeneity risk: A growing share of assets has migrated toward benchmark-like exposures to minimise tracking-error risk, potentially dulling diversification and long-horizon alpha—especially in unlisted and impact-linked assets.

In 2023, the 12 per cent TDP failure rate exposed variability across multi-asset options outside MySuper, pressing trustees to improve transparency and governance for non-default products. The government’s review indicates policy appetite to preserve the gains while reducing distortion.

Lessons: A smarter test can unlock national priorities and member value

What should business leaders in super and asset management take from this?

• Design drives behaviour: The 0.5 per cent tolerance and SAA-referenced benchmarks sharpened focus and cleaned out chronic laggards. But design features also nudged risk budgets toward listed markets. Expect boardrooms to treat benchmark construction as a strategic variable, not a mechanical input.
• Scale and specialisation win: Larger funds with in-house capability to value unlisted assets quarterly, manage liquidity, and explain risk-adjusted performance will hold an advantage under any enhanced regime.
• International playbook matters: UK value-for-money reforms and New Zealand’s KiwiSaver oversight show that next-gen accountability blends net returns with service and risk transparency. Australia’s recalibration will likely rhyme with these models, not repeat them.

Business impact: Strategy moves for early adopters

• Pre-emptive SAA tuning: Run parallel portfolios—one optimised for the current test, another for plausible reform scenarios (longer horizon, unlisted-blend benchmarks). Use this to set interim risk budgets and avoid cliff-edge adjustments.
• Data and valuation uplift: Invest in independent valuation frameworks, more frequent unlisted marks, and look-through to asset-level cash flows. This reduces tracking-error surprises and strengthens narrative credibility with boards, APRA and members.
• Liquidity architecture: Build contingency lines, staged commitment schedules, and secondary-market options for private assets to pass both the test and member switching events.
• Partnership pipelines: Should housing and energy transition receive clearer test treatment, prepare co-investment platforms with government, banks, and developers now to move first when rules land.

Future outlook: The next decade’s competitive landscape

The review’s centre of gravity is clear: keep the spotlight on underperformance, modernise the methodology to better reflect long-term, real-economy investing. If achieved, expect three shifts: (1) a re-acceleration into unlisted and impact-linked assets under stricter valuation and reporting standards; (2) further consolidation as data and risk capabilities become table stakes; and (3) a more nuanced member value narrative that balances net returns, volatility, and retirement adequacy.

For trustees, the winning posture is “both/and”: be test-robust and future-focused. In a $3.8–$3.9 trillion system, even small tweaks to the benchmark engine re-route billions. Those who treat the review as a strategic design moment—not a compliance footnote—will compound advantages in cost, capability and access to nation-building deal flow.