Performance test reforms to curb benchmark hugging: Treasury

Treasury is addressing benchmarking-hugging incentives encouraged by the superannuation performance test in a new round of consultations that aim to overhaul several "unintended consequences" it has created over the last five years.

Treasury acknowledges the industry's concerns super funds are constraining their investment universe and staving off allocating to assets outside the mainstream to ultimately pass the test or reduce underperformance.

Much of its new consultation centres on benchmarking reforms, suggesting the introduction of a new emerging asset class benchmark and the provision of a suitable benchmark for alternatives assets.

Venture capital, renewable energy projects and social and affordable housing, for example, are poorly represented in the benchmarks.

Another option is to assess total portfolio risk-adjusted returns using a simple reference portfolio. "This represents a departure from the current approach, which assesses investment performance relative to a strategic asset allocation benchmark portfolio," Treasury said.

"A simple reference portfolio would assess total portfolio returns against a risk-adjusted benchmark. This places greater emphasis on the quality of trustee investment decisions, such as strategic asset allocation, diversification, and other value-adding activities. By contrast, the current test does not explicitly account for risk in its assessment of investment returns."

The third option is to regularly review the benchmarks. A routine review ensures the benchmarks remain fit for purpose and align with the test's objectives, Treasury said, as this will also reflect structural changes in the markets.

Treasury is also proposing to extend the test to more superannuation products.

The test currently applies to some 560 products or 62% member benefits in APRA-regulated funds. Retirement products, for example, are outside the test's scope.

Expanding the test for diversified externally directed products in the accumulation phase - the majority of which are on platforms - is a possibility. Single- or multi-manager products, and separately managed accounts fall into this category.

Treasury is taking submissions in response to its consultation paper Strengthening the superannuation performance test until June 19.

APRA estimates a further 7500 products across 37 superannuation entities could be roped in.

Since it was introduced in 2021 and until last year, 108 of the 123 products that failed the test have been extinguished.

Financial Services Council Blake Briggs said: "A CPI + X benchmark for a limited portion of portfolios would provide funds with greater flexibility to invest in alternative assets that align with Australia's national priorities, with the continued safeguard of the best financial interests duty."

He is concerned, however, that a simple reference portfolio approach could water down the test if it reduces accountability for superannuation funds.

"Applying an investment performance and fees test to externally directed products, where consumers make decisions with professional advice, and to retirement products, where outcomes depend on individual retirement circumstances and needs, is not comparable to how the test is used for MySuper products," he said.

The Association of Superannuation Funds of Australia chief executive Mary Delahunty said the performance test "has done a great job" but it is now time to modernise it and to deal with some unintended consequences and make it stronger.

"The current test measures super fund performance against a fixed set of benchmarks. While it has successfully removed underperforming funds from the market, it has made some investments look artificially less attractive than they really are in a long-term context like super," she said.
Treasury's review of the test in 2022 proved these "unintended consequences" to be the case.

The following year, in response to fixing such issues, Treasury extended the test period from eight to 10 years to encourage longer-term investment decision, calibrated benchmarks so trustees were not unintentionally discouraged from investing in certain assets. It also extended the test to trustee-directed products.

Further tinkering in 2024 launched a consultation to refine the existing investment metric, consider alternative metrics and multi-metric frameworks to capture different dimensions of performance.

The new consultation builds on the outcomes of the government's 2025 Economic Reform Roundtable, which promised reforms to the test.

Treasurer Jim Chalmers said opportunities to modernise and strengthen the performance test can provide strong protections in light of the collapse of Shield and First Guardian.

Super Members Council chief executive Misha Schubert said the fact that tens of thousands of Australians have been exposed to products like the collapsed Shield and First Guardian, which weren't subject to the performance test despite being able to receive compulsory super contributions, "shows why closing these gaps is both urgent and essential."

Schubert also highlighted the need to strengthen the integrity of the test by fixing fee gaming risks.

Under the current settings, administration fees are assessed over the most recent 12 months, compared to a 10-year horizon for investment performance, opening the door to tactical gaming that can mask the fact that a super product is delivering poor returns, she said.