Super Nation is a fortnightly column that examines, explains and analyses key issues in one of Australia's largest, fastest-growing and most important industries: superannuation.
As the Australian Government moves forward with another review of the superannuation fund performance test, it raises an obvious question: what problem is it trying to fix?
All MySuper default products passed the test the last two times the Australian Prudential Regulation Authority (APRA) crunched the numbers on these custodians of more than A$1 billion (US$654 million) of Australians’ retirement funds.
But Treasurer Jim Chalmers is prepared to consider tweaking the annual test, which was introduced in 2021 for MySuper products and 2023 for Trustee-Directed Products (TDPs), to compare their investment results and fees with benchmarks.
Products that fail by underperforming by more than 0.50% per annum on the combined investment and fees test must notify members and, if they fall short for two successive years, they cannot accept new members.
You could hardly wave a larger red flag warning Australians not to use these funds and to consider moving their money elsewhere.
The scrutiny has been effective in one sense, with MySuper failures falling from 13 in 2021 to none in 2024 and 2025, and non-platform TPDs failures dropping from 20 to none in the last two years.
The platform TDPs story is more worrying because, although failures have dropped from 76 in 2023, seven did not pass this year.
The review seems to have widespread support among funds and their representative bodies, albeit many public statements are replete with broad principles rather than specific examples of the changes needed.
Chalmers told the recent economic roundtable he would consider adjusting the test to remove barriers for long-term investments in affordable or social housing and clean energy, which are two of his pet ‘nation building’ projects.
While most funds have been careful not to support these ideas too strongly, the Association of Superannuation Funds of Australia (ASFA) concedes that if they happened to align, it might be a nice coincidence.
Some support emerging
But at least two funds have been happy to get behind it, with Rest Super and HESTA supporting changes that allow for ‘emerging’ investments that might also be in the national interest.
“The performance test requires changes to remove obstacles to investment into emerging areas like the energy transition, decarbonisation, affordable housing and possibly other emerging local industries such as AI businesses and venture capital,” Rest Chief Strategy & Corporate Affairs Officer Tyrone O’Neill said.
HESTA CEO Debby Blakey believes the test should be modernised to consider the ‘net benefit’ to members, which measures credits to their accounts.
“This would support innovation in investment by removing the constraints of backward-looking benchmarks and provide more flexibility for funds to invest in emerging asset classes that deliver strong long-term returns and supporting economic growth,” Blakey said.
The Treasurer emphasised the Government would not abolish the test, which was odd given nobody has suggested it should be, nor would it interfere with the sole purpose of funds, which is to maximise returns for members.
ASFA Chief Executive Mary Delahunty and independent MP Allegra Spender were reported to have advocated at the roundtable for changes to the performance test to unlock investment in green technology, innovation and housing.
That may come as the review process advances, but some have questioned whether self-interested funds want the performance test hurdle to be lowered in recognition of the possibility that these asset classes will deliver worse returns than those they replace.
Another concern is that a fear of failure has encouraged a tendency for funds to invest passively by tracking indices rather than actively investing to maximise long-term returns, potentially at the cost of members’ retirement balances.
“As the people in this room well know, the performance test has given rise to unintended consequences, including benchmark hugging and encouraging investment strategies that are increasingly similar,” Delahunty said in a recent speech.
Spender is also seeking changes to requirements that super funds include stamp duty on direct residential property investments in fees, as required by the Australian Securities and Investments Commission’s Regulatory Guide 97, making fees look high.
Australia’s second largest super fund, Australian Retirement Trust, supports the test but believes that by looking back, it fails to capture the potential of new asset classes like those related to the transition from fossil fuels to renewable sources of energy.
“If you think about something like the energy transition, a performance benchmark that looks over the last 20 years doesn't necessarily pick up what's going to happen well over the next 20 years,” Chair Andrew Fraser said in a recent interview.
The cost to members
Not everybody is a fan of another review, least of all Super Consumers Australia (SCA), which speaks for low and middle-income Australians not traditionally represented by other bodies.
SCA CEO Xavier O’Halloran sees it as an unnecessary third look over of a system reviewed twice already, possibly to appease virtue-signalling industry bodies or advocates who want to be seen to align with the Treasurer and Government.
“These magical ideas are not coming forward to solve that kind of problems that people are talking about. All you can really do is trade-off members returns against these low quality investments,” O’Halloran told Azzet.
ASFA’s Delahunty has pushed back strongly on this, saying: “This is not about pursuing particular agendas or meeting government investment priorities – it’s about meeting the priority of our members – the best, risk-adjusted returns.”
Super Members Council, which represents profit-to-member industry, public sector and corporate funds, called the review a “a thoughtful consideration” of the test and saw it as “maximising opportunities to generate the strongest member returns”.
“SMC supports a strong performance test which weeds out underperforming products – and which does not discourage investment in asset classes that boost long-term, risk-adjusted returns for members,” the peak body said.
But some of the most vocal advocacy has come from ASFA, with Delahunty saying “modernising” the test would give funds the confidence to pursue innovative, more differentiated strategies and the certainty and flexibility needed to maximise returns.
“At times, what is in members’ best interests will align with broader policy goals, such as increasing the supply of housing, or catalysing clean energy at scale. High-return asset classes often deliver positive externalities – but those will be incidental outcomes, not the reason for reform in the first place,” she said.
