Case Study: Australia’s superannuation performance test as a catalyst for industry strategy

Context: A blunt instrument that moved the market

When APRA’s Your Future, Your Super (YFYS) performance test landed in 2021, it was designed to be simple, transparent and unmissable. Funds that underperformed a benchmark by more than 50 basis points per year over the test window would fail; fail twice, and you’re barred from accepting new members. The initial impact was immediate: in the inaugural 2021 assessment, 13 MySuper products failed, affecting roughly one million members, catalysing fee reductions, product closures and mergers.

By 2023, APRA expanded the assessment to trustee-directed products (TDPs), surfacing a long tail of under-performers. The expansion revealed widespread dispersion in outcomes beyond MySuper default options and intensified scrutiny of fees, asset allocation and governance practices. Industry feedback since has converged on two truths: the test has driven better average outcomes, and its design can create distortions—particularly around illiquid assets, active management and lifecycle cohorts.

APRA maintains the framework is lifting standards. Funds and several consultants argue the calibration needs refinement, not abandonment. That tension defines the 2025 debate: keep the pressure on, but fix the incentives.

Decision: From regulatory compliance to strategy redesign

Leading funds made four deliberate choices in the wake of the first-year shock:

• Benchmark-aware portfolio construction. CIOs re-engineered strategic asset allocations (SAA) to map more tightly to APRA’s reference portfolios, capping tracking error and rebuilding risk budgets for illiquids and active risk.
• Fee compression and simplification. Trustees used scale to renegotiate mandates, bring more assets in-house and simplify product menus—lowering disclosed fees and reducing the chance that fee outliers trigger test underperformance.
• Product rationalisation and M&A. Underperforming or sub-scale products were closed or merged. Boards leaned into consolidation, seeking cost-to-serve advantages and stronger investment governance at meaningful scale.
• RegTech and risk oversight. Funds built internal “shadow YFYS” dashboards, running daily or weekly test simulations across options to detect drift early and pre-empt remediation.

One large fund executive characterised the pivot succinctly: “We moved the performance test out of ‘compliance’ and into ‘strategy’. It now informs our SAA, cost base and member communications.”

Implementation: The technical reality behind passing the test

The mechanics mattered. The test compares each option’s net investment return to an APRA reference portfolio matching its disclosed SAA. That makes disclosure accuracy and SAA discipline mission-critical. Funds adopted several playbooks:

• SAA governance. Tighter corridors around SAA bands limited unintentional benchmark drift. For lifecycle MySuper options, cohorts were refreshed to ensure alignment between stated risk and realised exposures.
• Illiquid asset calibration. Unlisted property, infrastructure and private equity remain valuable for diversification and long-horizon premia, but can introduce tracking error versus listed proxies. Funds lifted valuation frequency, enhanced look-through risk analytics, and rescaled allocations to keep tracking error in a 50–100 bps range.
• Alpha where it counts. Active risk was concentrated where benchmark mis-specification is most pronounced (credit, small caps, select global equities), while high-cost, low-conviction mandates were culled.
• Cost engineering. Procurement programs targeted external manager fees, custody, market data and transition costs. Several funds reported multi-basis-point reductions from mandate renegotiations and insourcing of core beta.
• Member communication. “Fail plans” were pre-drafted—including remediation steps, fee cuts in train and timelines—to avoid reputational damage compounding investment outcomes.

Results: What moved—by the numbers

The directional impact is clear across three lenses:

• Fewer failures, fewer affected members. After the initial 13 MySuper failures in 2021 (circa one million members), subsequent cycles saw a marked decline in failures in the default segment. When trustee-directed products were first tested in 2023, dozens of options failed, surfacing issues beyond MySuper; in later cycles, industry reporting points to a meaningful year-on-year reduction in both the number of failing options and members affected as remediation took hold.
• Consolidation and scale. Independent industry analyses (e.g., KPMG Super Insights and WTW market studies) show that the top 10 funds now manage roughly two-thirds of APRA-regulated assets, up materially over recent years. The performance test accelerated this trajectory, with multiple public mergers and product closures since 2021 aimed at achieving fee and governance scale.
• Fee compression. Heatmap and consultant commentary indicate sustained downward pressure on MySuper fees. Funds report multi-basis-point reductions from manager renegotiations and simplification—small in isolation, material at system scale over decades.

APRA’s line remains consistent. As Deputy Chair Margaret Cole has said in public remarks, the framework “continues to drive better outcomes and transparency for members,” while APRA is open to evidence-based refinements. On the other side, large retail players including AMP and Insignia have publicly criticised aspects of the methodology—arguing it can penalise diversification and long-horizon investing when measured against short windows and stylised benchmarks.

Lessons: What business leaders can take from super’s stress test

• Make the metric the operating model. When a KPI determines licence to grow, build it into strategy. Funds that operationalised a live, internal performance-test model turned a threat into a design constraint—and avoided surprises.
• Concentrate active risk; industrialise the rest. Treat benchmark-relative risk as scarce capital. Spend it where the odds of persistent alpha are highest; run the core portfolio at institutional cost levels.
• Narrative discipline reduces regulatory risk. Tight alignment between disclosed SAA, realised portfolio and member communications is not cosmetic—it’s a control.
• Scale is a capability, not just an AUM statistic. Mergers only pay if they deliver lower unit costs, stronger governance and better data. Several integrations succeeded by prioritising operating model harmonisation over brand speed.

Market trends and competitive dynamics

Business impact. The test has re-priced risk appetite and cost structures. CIOs have trimmed tracking error budgets; CEOs have targeted operating leverage; boards have simplified product shelves to reduce regulatory drag. The bottom line: lower fees, cleaner menus and stronger default outcomes are becoming table stakes, not differentiators.

Competitive advantage. Early adopters of benchmark-aware design, robust RegTech and manager-fee compression gained headroom to retain illiquids and selective active risk without breaching guardrails—sustaining a performance edge while still passing the test.

Industry transformation. Consolidation favours funds with superior data, cost discipline and member engagement. Smaller funds face a strategic fork: specialise with clear value propositions, or seek scale through merger.

Technical deep dive: What should change in an overhaul

Calls for refinement are coalescing around pragmatic tweaks that preserve accountability while reducing distortions:

• Benchmark calibration. Improve the mapping of unlisted assets and credit to reference portfolios, reducing inadvertent penalties for diversification.
• Lookback windows and smoothing. Maintain an 8-year horizon for MySuper but adopt explicit valuation-smoothing protocols for illiquids to avoid pro-cyclical signals.
• Cohort-aware lifecycle testing. Test lifecycle vintages on a cohort basis to reflect differing risk targets across ages, rather than aggregating to a single result.
• Early warning bands. Introduce an amber zone (e.g., within 25 bps of failing) with structured remediation plans, avoiding cliff-edge dynamics.
• Fees and advice clarity. Increase consistency in fee inclusion and disclosure across complex TDP structures to ensure like-for-like comparisons.

Future outlook: A roadmap for trustees and regulators

Expect APRA and Treasury to continue iterative calibration rather than wholesale reversal. Internationally, regulators in the UK (Value for Money framework) and the Netherlands (outcomes-based supervision) are pushing in similar directions—tying scale, fees and net returns to member value. Australia will likely remain a reference model, provided it fine-tunes benchmark design without dulling the accountability edge.

For executive teams, the strategic playbook is clear: embed the test in investment and operating decisions; invest in data and scenario analytics; pursue fee and product simplification; and maintain the capacity for differentiated, long-horizon investing where the risk-adjusted opportunity remains compelling. In superannuation—as in any regulated market—the winners are those who treat regulation as design input, not afterthought.