Treasury's performance test consultation: what it means for super funds

Treasury’s consultation on strengthening the superannuation performance test has understandably generated significant discussion around benchmark construction, reducing barriers to investment and inclusion of new in-scope products.

For super funds operating in an environment of heightened member choice and intensifying competition, the consultation represents something broader: an opportunity to reassess how the performance assessment framework can influence a fund’s strategic positioning, investment behaviour and long-term differentiation.

The strategic themes emerging from Treasury’s consultation paper align closely with long-standing industry concerns relating to the methodology and its impact on competition, investment behaviour and the ability of funds to differentiate themselves over the long term.

How the performance test has shaped the industry

Since its inception, the performance test has evolved to become an influential market signal, shaping member perceptions, product decisions and competitive dynamics across the industry. 

It has increased accountability, sharpened focus on underperformance and accelerated product rationalisation across parts of the industry. It has also made performance outcomes more visible and accessible for members.

While originally designed to protect Australians’ retirement savings by holding trustees accountable for investment performance and fees, the test has further shaped behaviour beyond its original intent, including:

• serving as a regulatory mechanism to drive consolidation;
• influencing investment behaviours across the industry;
• shaping product design and architecture; and
• influencing trustee decision-making and risk appetite setting.

Treasury’s consultation provides an opportunity for funds to critically reflect on the way performance is measured and how it may increasingly influence how funds differentiate themselves in the market moving forward.

A strategic reassessment

Much of the industry discussion to date has focused on key aspects of the methodology itself, including appropriateness of benchmarks and the unintended consequences of how the test has shaped investment behaviour, including ‘benchmark-hugging’ and minimising tracking error. 

However, an equally important question is: how should funds respond strategically if the framework evolves, or if it largely remains unchanged?

That question raises broader considerations around:

• investment behaviours
• operational complexities
• governance frameworks
• product innovation and differentiation
• long-term strategic positioning

Funds should consider how the proposals outlined in Treasury’s consultation paper may materially impact how they operate, innovate and differentiate in an increasingly competitive environment.  

Looking forward, there are broader implications for portfolio construction and product design and architecture, including investing in alternative assets, lifecycle product design, and innovation in retirement income offerings. 

This consultation is a vital opportunity for funds to confront the unintended impacts of the current framework on investment strategies. By addressing these issues - and equally considering how to limit any further unintended consequences - funds can better differentiate themselves, compete more effectively and ultimately focus on delivering better outcomes for their members.

Balancing multiple objectives

While much of the discussion surrounding the consultation has focused on technical options for improvement or expansion, a broader question is also emerging: what is the performance framework ultimately trying to achieve?

Increasingly, there appear to be multiple objectives operating simultaneously:

• protecting member outcomes;
• encouraging efficiency and consolidation;
• maintaining confidence in the system and increasing transparency;
• supporting long-term investment capability; and
• potentially influencing capital allocation across areas viewed as strategically important to the broader economy. 

For example, policy settings that create greater flexibility for investment in areas such as renewable energy or social and affordable housing may reflect broader economic priorities alongside pure performance considerations. 

Industry participants have questioned whether certain proposed changes - including the introduction of CPI-linked approaches, increasingly tailored benchmark adjustments, and reference portfolios - introduce additional complexity or unintended behavioural consequences into the framework.

This isn’t an argument against reform. Rather, it highlights the challenge of balancing multiple objectives within a single performance framework. It raises a strategic question for the sector: how do funds balance fiduciary duties and public expectations with the role they are expected to play in the Australian economy?

Regulatory frameworks and market behaviour

One of the more significant themes emerging from the consultation is the recognition that performance frameworks do not simply measure markets - they shape them.

This is not unique to superannuation. Across regulated industries, measurement frameworks often influence incentives, capital allocation and operating models over time.

As the superannuation system matures, the next phase of discussion will increasingly focus on how accountability frameworks interact with innovation, emerging markets, competition and long-term member outcomes.

The challenge for policymakers is not only whether the performance test measures outcomes accurately, but whether it encourages the types of behaviours the system ultimately wants to promote. That involves balancing:

• accountability and flexibility;
• comparability and innovation; and
• short-term measurement and long-term investment outcomes.

For funds, this creates an opportunity to engage constructively on the broader strategic consequences of the framework.

Looking beyond the submission

The performance test has become one of the most consequential mechanisms in the superannuation system. As Treasury considers the next phase of its evolution, funds have an opportunity to do more than prepare a submission. They can assess how changing performance dynamics may shape strategic positioning in an increasingly competitive superannuation landscape.

Key considerations include:

• the long-term behavioural impacts of the framework;
• implications for investment strategy and innovation;
• member outcome considerations;
• governance and operational impacts; and
• influence on competitive dynamics over time.

In this sense, the consultation can serve as a catalyst for broader strategic reflection across the sector.

If you'd like to explore what this means for your fund, please reach out to our team.