Key implication: The performance test has moved from a compliance exercise to a capital allocator. It determines which products attract flows, which strategies survive, and which brands retain trust. With renewed calls for refinement following the latest results, trustees and executives face a strategic trade-off: maintain accountability while avoiding a one-size-fits-all regime that inadvertently drives benchmark hugging and underinvestment in productive, long-term assets.

What the test measures—why it matters

APRA’s annual performance test, introduced under the Your Future, Your Super reforms (2021), compares a product’s net investment performance against a reference portfolio built from standard market indices aligned to the product’s strategic asset allocation. MySuper options are assessed over eight years; trustee-directed (choice) products were brought into scope from 2023. A product fails if it underperforms its benchmark by more than 50 basis points per annum over the assessment period, after fees. One failure requires member notification; two consecutive failures bar the product from accepting new members.

The mechanism is deliberately simple: clarity for members and regulatory teeth for chronic underperformance. But simplicity brings friction. Lifecycle MySuper designs with age-based cohorts, unlisted assets with valuation lags, downside protection overlays, or impact/ESG tilts can all diverge from the standard proxy indices in ways not fully captured by the test. That’s the crux of today’s debate: how to retain discipline without flattening diversity of investment approaches that can, net-net, benefit members.

Business impact: transparency gains—and consolidation pressure

The test has undeniably sharpened accountability. Underperforming products have exited or merged, fees have fallen, and boards are more forensic about strategy drift and implementation. APRA has consistently framed the test as a member-first mechanism: capital and attention must shift to products that deliver persistent value.

It has also catalysed industry consolidation. Independent analysis from major consultancies has tracked a marked acceleration in mergers since 2021, with mid-tier and sub-scale funds combining to reach cost and capability thresholds in investment, data, risk, and member experience. Case in point: a series of mergers involving retail and niche funds post-underperformance or regulatory scrutiny, and specialist funds closing or transferring members when scale or performance could not be credibly remediated. The direction of travel is clear—fewer, larger funds with industrial-strength operating platforms.

For employers and members, this has immediate implications: simpler market choice sets, more scrutiny of default arrangements, and greater emphasis on transition execution when products close. For providers, scale is no longer optional—it is the entry ticket to compete on net outcomes and withstand the volatility of being measured annually against public benchmarks.

Competitive dynamics: the herding risk is real

Boards and CIOs increasingly acknowledge an unintended consequence: strategy convergence. When the cost of failing is brand-damaging member letters and growth limits, investment committees naturally calibrate portfolios closer to benchmark proxies. This risk is most acute in illiquid and alternative allocations where benchmark fit is imperfect. Some CIOs have already shifted from opportunistic, high-tracking-error bets to tighter ranges and more liquid expressions of risk, a rational response but potentially costly for innovation and long-term returns.

ESG and sustainability strategies face a parallel issue. Where climate pathways, transition exposures, or real-economy investments (e.g., renewables, social infrastructure) deviate from benchmark weights, the test can penalise in the short run even if long-horizon payoffs are attractive. Member demand for values-aligned options has grown, but the performance test design needs to ensure such offerings are assessed on risk-adjusted merit, not merely benchmark proximity.

Implementation reality: data, design, and disclosure hard yards

The organisations that are winning under the regime show three patterns:

• Portfolio engineering: Pre-commit strategic asset allocation bands and rebalancing rules that map cleanly to APRA’s reference indices. Where exposure is non-benchmark (private credit, venture, transition infrastructure), articulate the risk budget and expected tracking error through the cycle.
• Valuation discipline: Tighten valuation policies for unlisted assets to minimise lag and ensure fair-value alignment, particularly around quarter-ends used in performance testing.
• Member narrative: Build clear, plain-English disclosure explaining design intent, cohort differences, and long-horizon expectations—so member letters (if ever needed) inform rather than alarm.

Technology and data are now front-of-house. Robust look-through analytics, factor decomposition, and scenario testing are essential. Several funds have invested in factor-based performance attribution tools to pre-empt test risk and simulate outcomes under different benchmark and market regimes. The capability gap here is widening and will be a competitive separator.

Market context: what latest results signal

As choice products were brought into scope, the first wave produced a materially higher fail rate than MySuper—unsurprising given the breadth and legacy complexity of the choice universe. Subsequent assessments have sustained pressure on small and legacy products, with sustained underperformers exiting and member balances transitioning to better-rated options. For employers, that translates to a simpler due diligence path for default plans and a measurably lower risk of staff being stuck in poor-performing products.

The macro backdrop matters. With rates higher and public markets more volatile post-2022, dispersion of returns has increased. That makes year-on-year results noisier and the eight-year horizon even more important. It also underscores the need for test refinements that distinguish luck from skill, and cyclical underperformance from structural failure.

Global perspective: convergence on value-for-money, divergence on method

Australia is not alone. The UK is progressing a Value for Money framework for defined contribution schemes, combining net returns with service and cost metrics. The Netherlands relies on rigorous supervision and risk-based assessment within collective schemes. In the US, fiduciary litigation has forced fee and performance scrutiny in 401(k) plans. The international lesson: transparency is non-negotiable, but methodologies evolve to reflect market structure and member expectations.

What should change—and what should not

Industry bodies and consultants largely agree on the direction of refinement: keep the bright line on accountability; enhance the measurement of risk and strategy intent. Practical options include:

• Risk-adjusted lenses: Incorporate complementary risk metrics (e.g., volatility or drawdown-aware lenses) alongside the existing absolute underperformance threshold to reduce perverse incentives.
• Lifecycle nuance: Assess age cohorts separately for lifecycle MySuper products to avoid cross-subsidies and misattribution.
• Illiquid asset treatment: Improve alignment of private markets benchmarks and valuation timing to reduce measurement distortion while preserving incentives for productive investment.
• Choice product taxonomy: Tighten product categorisation so like-for-like strategies are compared, reducing noise in the choice test.
• ESG clarity: Allow transparent, pre-declared factor tilts or sustainability objectives to be recognised in the reference portfolio where evidence-based and bounded.

What should not change: the consequences for repeated failure and the requirement to inform members. These are the levers that have delivered real improvement.

Strategic playbook for boards and executives

Three actions belong on next quarter’s board agenda:

1. Codify a performance test risk appetite: Define acceptable tracking error by asset class and at total portfolio level, tied explicitly to member outcomes and the test benchmark. Mandate pre-commitment of remediation triggers.
2. Invest in attribution and simulation: Deploy factor-based tools to decompose performance versus the test, run scenario analyses for rate shocks and equity drawdowns, and stress-test illiquid allocations.
3. Design for clarity: Where the strategy differs from the benchmark, bake in a communication architecture—member materials, employer packs, adviser briefings—that explains why, how long, and how success will be judged.

The destination is not a softer test, but a smarter one. Business leaders who treat the regime as a design constraint—not a handbrake—will compound trust, flows, and long-term performance.