Superannuation Performance Test Sparks Industry Debate on Member Interests

Australia’s superannuation landscape has been undergoing significant changes, driven by the implementation of APRA’s performance test. This test has brought to light chronic underperformance within the superannuation sector and has prompted a wave of consolidation among funds. However, the latest results have sparked a critical debate regarding the efficacy of a backward-looking benchmark in balancing member interests with long-term investment goals.

The Treasury’s indication of a review underscores the pivotal role the next iteration of the performance test will play in shaping the industry. This review will not only influence fees and portfolio construction but also impact the flow of capital into crucial sectors such as housing, energy, and infrastructure. The question looms large: can a single benchmark effectively safeguard members’ interests while fostering sustainable, nation-building investments over extended time horizons?

The performance test, a cornerstone of the Your Future, Your Super reforms, evaluates products based on their net returns compared to a composite benchmark derived from strategic asset allocations. Products failing this assessment risk closure after two consecutive failures and are required to notify members and halt new enrollments. This stringent approach has compelled fund boards and CIOs to navigate a new realm of constraints alongside risk management and sustainability targets.

The test has undeniably raised the bar for value for money and expedited the clean-up of underperforming products. The initial years witnessed a significant number of failures, especially in MySuper options, leading to a subsequent decline as laggards either exited the market or revamped their strategies. As the regime expanded to include trustee-directed products (TDPs), failures surged, indicating a broader application of the discipline to more complex investment choices. Notably, fees have decreased, and consolidation has accelerated, with many funds merging to enhance efficiency and improve returns.

While the performance test has been effective in addressing chronic underperformance, concerns have been raised regarding its impact on innovation, illiquid investments, and unintended herding behavior. The test’s backward-looking nature and focus on listed indices pose challenges for funds with longer investment horizons and allocations to illiquid assets. Additionally, the test’s narrow evaluation scope fails to consider risk-adjusted performance, sequencing risk for near-retirees, and non-financial objectives like climate targets, creating a dilemma for funds with distinct investment strategies.

To navigate these challenges, leading funds are adopting strategies to manage performance-test risks without compromising long-term investment objectives. These strategies include maintaining a two-tier strategic asset allocation, conducting ex-ante test modeling, enforcing fee discipline, enhancing liquidity and valuation governance, and segmenting members based on their risk profiles. By treating the performance test as a design constraint rather than the sole objective, funds aim to strike a balance between compliance and sustainable, member-centric outcomes.

As the industry awaits the outcome of the Treasury’s review, potential refinements to the performance test could include broader benchmarks, a multi-metric scorecard, cycle-aware assessment windows, and safe harbors for scale investments in critical sectors. These adjustments seek to maintain accountability while fostering long-term investment in essential projects, acknowledging superannuation’s role as a source of patient capital for nation-building initiatives.

Australia’s experience with the superannuation performance test mirrors global trends towards transparency and accountability in the pension sector. Countries like the UK and the Netherlands are also recalibrating their frameworks to encompass net performance, fees, and service quality, reflecting a broader shift towards multi-metric evaluations that align with member outcomes. Australia has the opportunity to lead this evolution by integrating long-term investing principles into a robust accountability framework, ensuring that what is measured aligns with what members truly need for a secure and prosperous retirement.