Case Study: Australia’s superannuation performance test—calibrating accountability and long-term investing

Context: A blunt tool that delivered results—and new frictions

Introduced under the Your Future, Your Super reforms, the Australian Prudential Regulation Authority’s (APRA) annual performance test compares each product’s net return to a reference portfolio built from disclosed strategic asset allocation (SAA) weights and standard indices. If a product underperforms the benchmark by 50 basis points per annum or more over the lookback period (eight years for mature MySuper options), it fails. Two consecutive failures close the product to new members.

The test achieved its primary goal: it shone a bright light on chronic underperformance and catalysed consolidation. APRA’s early rounds saw a double-digit count of MySuper failures in 2021 and further failures in 2022–23; when extended to the Choice sector in 2023, scores of options missed the mark. The result has been a wave of mergers and product closures, with sizeable transfers such as BT Super’s move into Mercer and other combinations that collectively shifted tens of billions of dollars and simplified product shelves.

But success brought side effects. CIOs argue the benchmark penalises “lumpy” or early-life investments—private equity, venture, unlisted infrastructure, energy transition platforms—that can lag public indices in the short run or reflect valuation timing differences. Industry bodies—the Financial Services Council (FSC) and the Association of Superannuation Funds of Australia (ASFA)—now back targeted changes so funds can pursue strong, risk‑adjusted returns without failing a test designed for accountability, not capital planning.

Decision: A targeted recalibration, not a rewrite

The Treasurer’s review aims to preserve member protection while improving investment flexibility. Based on consultation signals and industry submissions, the plausible refinements cluster in four areas:

• Benchmark construction: More representative indices for unlisted and alternative assets; explicit allowances for tracking error when tilting away from cap-weighted public benchmarks.
• Risk-adjustment: Complementing absolute deviation with risk-sensitive measures (e.g., downside capture, volatility or drawdown metrics) over an eight-to-ten-year horizon.
• Choice product nuance: Recognising the heterogeneity of Choice options with fit-for-purpose cohorts and consequences proportionate to member risk profiles.
• Valuation cadence: Clearer guidance on unlisted valuation frequency and methodologies to reduce timing distortions versus daily‑priced indices.

The goal is not to weaken scrutiny, but to avoid an unintended bias toward listed beta, short-duration credit and benchmark-hugging portfolios at the expense of productive, long-dated assets.

Implementation: How CIOs are adapting portfolios and processes

Funds that want to maintain real assets and private markets exposure—without jeopardising their test margin—are already changing how they construct and operate portfolios:

• Dual-mandate portfolio design: Structuring “core” benchmark-aware exposures that protect the performance test headroom, while housing long-horizon assets in “satellite” sleeves sized to the test’s tracking‑error budget.
• Overlay and liquidity management: Using futures and swaps to neutralise factor drifts versus the test benchmark, and building larger liquid buffers so cashflows don’t force sales of unlisted positions during drawdowns.
• Valuation discipline: Quarterly or event-driven revaluations for unlisted assets, tighter governance on appraisal assumptions, and external valuation panels to address audit and comparability requirements.
• Staging and pacing: Smoothing capital calls into private markets to avoid concentrated vintage risk and short-term underperformance spikes.
• Benchmark mapping: More granular SAA disclosures and better mapping of alternatives to blended reference indices to reduce specification error.

Operationally, this requires close coordination among investment, risk and compliance teams, with performance test dashboards that monitor headroom by asset class and scenario test the consequences of market shocks, valuation updates and SAA shifts.

Results: What the data says so far

Three measurable outcomes have emerged since the test began:

• Fewer poor performers: APRA’s heatmaps show a shrinking tail of chronic underperformance in MySuper, with several products exiting or merging after failures. This has redirected members into better-rated options.
• Consolidation momentum: Post‑test, the industry has accelerated towards scale—mergers moving hundreds of billions in assets—supporting lower fees and deeper internal investment teams.
• Portfolio tilts: A detectable drift to liquid, listed exposures among some funds—especially those close to the test threshold—while larger funds with bigger headroom have continued to commit to private markets and infrastructure. The system still deploys roughly $40 billion each quarter, but the mix has become more benchmark‑aware.

At the macro level, the system’s asset base now exceeds A$3.5 trillion and is projected to keep expanding materially over the next decade, making the calibration of this test consequential for national investment capacity, including housing, energy transition and digital infrastructure.

Case comparisons: What other markets are doing

Australia is not alone in tightening outcome-based oversight. The UK is rolling out a Value for Money framework that weighs net performance, costs and service; the Netherlands leans on risk-based solvency and performance disciplines for pension schemes; Canada’s large plans pair rigorous governance with latitude to invest heavily in private markets. The common thread: stronger accountability, but with frameworks that accept illiquidity and multi‑period payoffs when governance is demonstrably robust.

Business impact and competitive advantage

For super funds: Early movers that build robust test‑aware architecture—precision SAA mapping, risk overlays, rigorous valuations—can preserve allocations to higher‑alpha private markets without courting failure notices. Scale becomes a structural edge: larger funds can diversify vintages, warehouse risk and internalise more capability, improving net returns after fees.

For asset managers: Strategies mapped cleanly to benchmark proxies, with transparent risk budgets and liquidity ladders, will win mandates. Private market managers that provide index‑aware performance reporting and smoother capital call profiles will outcompete opaque vehicles.

For the real economy: A refined test could channel more super capital into national priorities—renewables, transmission, housing supply, digital infrastructure—provided risk-adjusted returns stack up. Policymakers’ emphasis on “patient capital” aligns if the test no longer penalises timing and valuation dynamics.

Lessons: What decision-makers should do now

• Rehearse the rulebook: Build a multi-metric dashboard that tracks not just absolute deviation from the test benchmark, but also drawdown, volatility and liquidity coverage. Treat the performance test as a binding constraint alongside return and risk objectives.
• Codify valuation governance: Adopt quarterly unlisted valuations with independent oversight; stress-test appraisal inputs and disclose valuation lags to trustees.
• Engineer headroom: Use core beta overlays to secure a performance buffer, freeing capacity for unlisted and active risk where your edge is strongest.
• Right-size the illiquidity budget: Link private markets pacing to net inflows, liquidity stress tests and member behaviour; avoid cliff effects around known test dates.
• Engage early with policy shifts: Participate in consultations; pilot reporting templates that reflect potential changes (e.g., adjusted benchmarks for alternatives) so you can move quickly when rules land.

Future outlook: From compliance to competitive positioning

The review is likely to land on targeted changes rather than a wholesale redesign—retaining the discipline that has benefited members while easing the short-termism that can stifle productive investment. Expect more representative benchmarks for alternatives, better choice‑cohort design, tighter valuation guidance and possibly complementary risk metrics. For leaders, the opportunity is to treat the new scorecard not as a ceiling but as a platform: lock in benchmark headroom, deepen private markets capabilities, and align portfolios with long‑dated, nation‑building opportunities—without sacrificing accountability.