Key implication: The performance test has raised the floor on value for money, but in its current form it increasingly pulls portfolios toward low‑tracking‑error, listed beta. Unless recalibrated, trustees will manage to the metric rather than to member outcomes over decades — a textbook case of Goodhart’s Law.

What the test measures — and why it bites

APRA’s annual performance assessment, introduced under the Your Future, Your Super reforms, compares each product’s net returns over a rolling multi‑year window against a composite benchmark built from its strategic asset allocation (SAA) to listed indices. A product fails if it falls materially short of the benchmark tolerance and, if it fails twice, faces closure. The test covers fees and taxes and applies to MySuper defaults and, more recently, trustee‑directed products (TDPs).

It is simple, scalable and hard to ignore: fail, and you must write to members and stop taking new ones. For boards and CIOs, that creates a binding constraint that now sits alongside risk budgets, liquidity limits and climate targets in investment committees’ dashboards.

What’s worked: a higher floor and faster clean‑up

Three shifts are clear from APRA’s published results and sector data. First, the inaugural year produced double‑digit failures in MySuper, followed by a sharp drop the next year as laggards exited or retooled. Second, when the regime expanded to TDPs, failures spiked — a sign the discipline was reaching more complex, choice products. Third, fees trended down and consolidation accelerated. APRA‑regulated funds have roughly halved in number over the past decade, and the test has been a catalyst for mergers and product closures. Large transfers — such as BT Super’s move into Mercer — underline how boards are using scale to reduce unit costs and improve net returns.

The Productivity Commission long argued for stronger performance accountability, and APRA has consistently emphasised member benefits from eliminating chronic underperformance. On these metrics, the regime has delivered.

Where it frays: innovation, illiquids and unintended herding

Investment leaders and consultants have flagged three structural concerns.

• Horizon mismatch: The test is backward‑looking and relatively short compared with super’s 30‑ to 40‑year horizons. When the cycle turns, a multi‑year underweight to momentum‑driven indices can trigger a fail even if the strategy is prudent through the cycle.

• Illiquid penalty: Benchmarks built from listed indices sit awkwardly next to unlisted assets whose valuations are smoothed and idiosyncratic. CIOs argue that accommodating Australia’s need for patient capital — housing, renewables, transmission, digital infrastructure — requires tolerating higher tracking error and valuation lags. Investment Magazine and others have reported widespread concerns about “herding behaviour” as funds crowd closer to index exposures to avoid failure risk.

• Narrow lens: The test focuses on net returns versus a reference portfolio, not risk‑adjusted performance, sequencing risk for members approaching retirement, or non‑financial objectives such as climate pathways. That creates tension for funds with strong ESG targets or differentiated inflation‑hedging strategies.

The result is a portfolio construction puzzle: optimise to pass the test, or optimise for long‑term, real, risk‑adjusted outcomes — and hope policy keeps pace.

Competitive playbook: managing to the metric without becoming the metric

Leading funds are treating performance‑test risk as a design constraint, not the design objective. Five practical moves are emerging:

1) Two‑tier SAA: Maintain a benchmark‑aware core with cheap beta, and a capped “alpha and illiquids” sleeve sized to the fund’s tolerance for tracking error relative to the test. Use factor overlays to neutralise unintended bets versus the test’s reference portfolio.

2) Ex‑ante test modelling: Build daily “shadow tests” that estimate the fund’s score under multiple benchmark mappings and valuation scenarios. Stress test for rising rates, equity drawdowns and vintage‑year dispersion in private markets.

3) Fee discipline at meaningful scale: Lock in merger synergies and supplier resets early. APRA’s heatmaps show fee reductions translate directly into improved test outcomes; unit cost targets should be embedded in CIO scorecards.

4) Liquidity and valuation governance: Tighten unlisted valuation frequency, third‑party reviews and disclosure. Transparent methodologies reduce perceived smoothing and make board sign‑off easier if drawdowns widen relative to listed proxies.

5) Member segmentation: For pre‑retirees, dial down sequencing risk even if it adds short‑term tracking error. Communicate clearly why a slightly lower test “score” can still be a better outcome for a 58‑year‑old member.

Policy choices: refine the measure, don’t blunt the mission

Following industry consultation and ministerial roundtables, Treasury has flagged a review to remove unintended barriers to institutional investment in housing and the energy transition. Options that preserve accountability while improving alignment include:

• Broader benchmarks: Allow approved, investable reference portfolios for unlisted infrastructure, property and private credit that better reflect expected return drivers rather than forcing listed stand‑ins.

• Multi‑metric scorecard: Retain the net‑of‑fees benchmark test but add complementary indicators — risk‑adjusted returns, drawdown metrics for near‑retirees, and fee reasonableness tests — presented as a dashboard rather than a single pass/fail gate.

• Cycle‑aware windows: Use overlapping windows with recession/expansion weighting or extend the horizon for asset classes with long payback periods, reducing pro‑cyclicality.

• Safe harbour for scale investments: Provide time‑limited relief when funds commit to nationally significant, member‑benefiting projects (e.g., social and build‑to‑rent housing) subject to strict governance and disclosure.

These adjustments would keep pressure on chronic laggards while recognising super’s structural advantage: patient capital.

Global context: Australia is not alone

The UK’s emerging “Value for Money” framework similarly shifts focus toward net performance, fees and service quality, with regulators wary of short‑termism. The Netherlands couples strict risk budgeting with peer‑relative assessment. The trend line is clear: transparency and accountability are non‑negotiable, but regimes are evolving toward multi‑metric views that better capture member outcomes. Australia can lead by integrating long‑horizon investing into a still‑tough accountability framework.

What to watch next

• Test recalibration timeline: Any changes need transitional arrangements; CIOs should scenario‑plan both status quo and revised rules through FY26.

• M&A cadence: Expect further consolidation as sub‑scale products weigh the cost of passing the test versus joining a larger platform.

• Capital deployment: If safe harbours or refined benchmarks land, watch for an uptick in super capital flowing to housing supply, grid modernisation and firming assets.

• Data quality: Better SAA mapping, look‑through holdings and valuation disclosures will be the quiet superpower for both passing the test and retaining member trust.

The bottom line for boards: sustain the test’s hard edge on value for money, but evolve it so that what gets measured is what members actually need — inflation‑beating, risk‑aware, long‑horizon returns.