The annual super performance test was introduced in 2021 by the previous government as a way to hold registrable superannuation entity (RSE) licensees to account for any underperformance through greater transparency. The annual test, conducted by APRA, also allowed members of funds and products to move to better performing funds and improve their retirement outcomes.

Essentially, APRA assesses the performance of super investment options every year against tailored benchmarks. This has applied to MySuper products since 2021 and was recently extended to Trustee Directed Products (a subset of the choice sector) in 2023. According to estimates, the annual test covered 80 MySuper products which accounted for 14m member accounts containing $900bn in assets, and around 805 Trustee Directed Products consisting of a further 4m member accounts and $360bn in assets.

Products that fail the test are subject to clear legislated consequences. Where the test is failed for one year, the trustees must write to affected members notifying them that the product they have invested in has failed the test. Where a product fails the test 2 years in a row, it is closed to new members until it passes a future test. In addition, funds that fail the test will often be subjected to heightened supervision from APRA to ensure that trustees are delivering better outcomes for their members.

However, the current government initiated a review of these performance tests after receiving feedback from the industry that the tests may have unintended consequences, including focusing on investment implementation over other measures of performance, encouraging short-term decision making, incentivising super funds to “hug” benchmarks, reducing investment flexibility, and a reduction in choice, diversification and active management.

To mitigate this, the government has released a consultation paper which considers improvements to the performance test to improve its sophistication while still ensuring the test holds trustees to account for delivering the best outcomes. It is seeking views on the preferred design and approaches, with 4 options on the table.

Option 1 is keeping the status quo, which involves keeping the current product performance and benchmark measurements. Option 2, f using an alternative single metric, is divided into the following subcategories:

• sharpe ratio, which assesses how effectively the trustee delivers risk-adjusted investment returns above that of the risk-free rate;
• peer comparison of risk-adjusted returns, which assesses whether a product is providing competitive risk-adjusted returns compared to peers (ie product cohort such as MySuper);
• risk-adjusted returns relative to Simple Reference Portfolio frontier which assesses whether a product provides superior investment returns relative to a simple benchmark portfolio that bears a similar level of risk.

Option 3 is the use of multi-metric frameworks such as the Heatmap which assesses the performance of a product against multiple metrics (similar to the APRA heatmaps) to provide a comprehensive performance assessment. Another alternative multi-metric is the use of targeted three-metric which assesses the performance of a product against a smaller set of metrics to provide a more comprehensive assessment relative to the current test, but similar than the Heatmap option.

Finally, Option 4 provides the opportunity for stakeholders to put forward an alternative framework not canvassed in the first 3 options that would satisfy the key principles of improving member outcomes, being effective and efficient, being widely applicable and transparent, and enduring. While the government has not committed explicitly to making the changes recommended by stakeholders, interested parties are encouraged to provide input to guide any potential future changes.