The business implication lands first: the performance test is now the most powerful capital allocator in Australian finance after monetary policy. Its construction sets the risk budget for super funds, pushes product closures, and steers billions either towards listed benchmarks or into long‑duration assets. A government review, flagged after the 2025 results, puts that steering wheel back in motion. Boards, CIOs and policy‑makers now have a narrow window to shape a regime that protects members while enabling investment in ‘productive’ assets.

How the test works—and why it skews portfolios

APRA’s test assesses a product’s net investment performance against a tailored benchmark built from listed market indices that mirror the product’s disclosed strategic asset allocation. If a product lags its benchmark by more than 0.5 percentage points per annum over the assessment horizon, it fails; two consecutive fails mean no new members and a likely wind‑down. MySuper options are judged over a long look‑back (originally eight years), with trustee‑directed products assessed over the longest available window.

The design creates a strong incentive to minimise “tracking error” to listed benchmarks. Unlisted assets—property, infrastructure, private equity, and newer areas like build‑to‑rent or clean energy platforms—are typically benchmarked to listed proxies that do not match their cashflows, valuation cadence or risk premia. That mismatch can convert into relative underperformance in certain cycles, even when long‑term value is sound. The net effect: a structural tilt towards listed markets, higher liquidity than needed for long‑horizon savers, and a bias against assets whose return pathways are lumpy but attractive over 10–20 years.

The policy clash: member-first returns vs national investment needs

Can a fiduciary test also advance national priorities? Consumer advocates argue the test has delivered tangible wins: lower fees, simpler products and clearer accountability. APRA’s early years saw dozens of underperforming or legacy products exit or merge, improving average outcomes. On the other side, large funds and managers say the current framework crowds out capital for housing supply, energy transition and critical infrastructure—areas where super’s patient balance sheet is an advantage but index-relative evaluation is a constraint.

The government’s review, signalled by the Treasurer, explicitly seeks to remove “unnecessary obstacles” to investing in areas of national need. Shadow finance voices caution against politicising asset allocation or relaxing standards that protect members from persistent underperformance. The centre of gravity is moving towards a “both/and”: preserve accountability while calibrating the test so long‑term, illiquid investments aren’t structurally penalised.

What the numbers tell us—and where they don’t

Australia’s super pool—around A$3.7 trillion—now rivals the GDP in scale. Even marginal shifts in test design redirect tens of billions over time. The first years of testing triggered a wave of product rationalisation, with member alerts forcing funds to close or remediate failing options. In the trustee‑directed universe, some providers (e.g., platform groups and legacy-oriented retail offerings) downplayed failures because of low balances or planned closures; others accelerated product migrations to reduce risk of repeat fails. These behaviours show the test’s potency but also its bluntness: it successfully exits poor products, yet it can punish innovation where performance paths diverge from listed benchmarks.

Internationally, regulators are converging on multi‑metric frameworks. The UK’s emerging Value for Money regime blends net returns, costs and service quality; the Netherlands emphasises long‑term funding and risk management; Canadian plans measure value added versus reference portfolios but grant latitude for illiquids where governance is strong. The lesson: single‑number tests enforce discipline; multi‑metric scorecards better capture persistence, risk and member experience.

Actuaries’ two‑metric fix and a pragmatic middle path

The Actuaries Institute has argued for a more nuanced regime: retain a benchmark‑relative metric to deter chronic underperformance, and add a complementary measure that recognises risk, liquidity and horizon. Options include a risk‑adjusted return (e.g., Sharpe‑like or downside‑risk metric), a long‑horizon assessment for illiquids (using internal rate of return or vintage‑aware measures), or a “value‑added versus reference portfolio” gauge that separates strategic asset allocation (beta) from implementation (alpha and cost control).

Technically, this implies three design tweaks that keep the test investable without dulling its edge:

• Horizon matching: use longer lookbacks and vintage‑cohort analysis for private assets to avoid forcing multi‑decade investments through a short, listed proxy lens.
• Transparent risk budgets: allow a measured tracking‑error allowance for defined illiquid sleeves, with enhanced disclosure so members see the trade‑off.
• Service and resilience factors: include net benefit measures beyond returns—fee trends, retirement income adequacy, and operational resilience—so funds don’t “teach to the test”.

Business impact: who wins, who adapts, who exits

For large industry funds with internal capability, a refined test could be a tailwind. They can warehouse illiquids, negotiate fees, and structure co‑investments that harvest private premia while managing tracking error. For platform and legacy providers with fragmented product sets, the direction is clear: simplify, merge into scalable defaults, and invest in risk systems that are “performance‑test aware”. Active managers face a barbell: genuine high‑conviction strategies that justify tracking error will survive; closet‑indexing at active fees will fail both the test and member scrutiny.

Project developers in housing and energy should not read the review as a blank cheque. Super capital will still demand institutional‑grade pipelines: contracted cashflows, robust governance, and sensible fee structures. Where governments want catalytic outcomes, risk‑sharing tools—credit enhancement, planning certainty, or first‑loss tranches—will matter more than rhetoric.

Implementation reality: governance, data and member trust

Boards should treat the review as a live risk. Immediate steps:

• Portfolio engineering: map every product’s tracking‑error budget, stress‑test against plausible benchmark shocks, and identify illiquid sleeves where horizon extensions or benchmark adjustments would materially change pass/fail odds.
• Valuation discipline: tighten private asset valuation frequency and methodologies; improve look‑through data so benchmark mapping reflects actual exposures.
• Product rationalisation: exit marginal, small‑balance options that cannot clear the hurdle in a revised regime; concentrate members in well-governed, scalable strategies.
• Member communication: explain trade‑offs in plain English—why some long‑term assets may lag in a given year yet improve retirement outcomes.

Strategic outlook: a test built for the 2030s

The likely end‑state is not deregulation but smarter regulation: a two‑metric or scorecard model that keeps the bright‑line consequence for chronic underperformance while refining how long‑horizon assets are judged. Expect stronger disclosure on risk and persistence, modest flexibility for productive finance, and tougher expectations on governance and fees. For boards, the opportunity is to codify an investment process that wins under any credible regime: costs under control, true diversification, and a repeatable edge in sourcing and managing complex assets.

If the review hits that balance, Australia can have both: a world‑class member‑first system and a deeper pipeline of investable projects in housing and clean energy. If it doesn’t, capital will keep hugging the benchmark—and the economy will feel the opportunity cost.