We along with CPA Australia made a submission to the Treasury consultation ‘Strengthening the superannuation performance test’.

We support the objective of removing unintended barriers to investment while maintaining strong member protections. However, in our view, incremental changes to the benchmark architecture will not adequately resolve the structural problems identified in the Consultation Paper. Even after any amendments that may be made to the performance test as a result of this consultation, significant problems will remain with the Your Future, Your Super (YFYS) rules and another round of changes will need to be implemented.

The key weakness in the current performance test is that it assesses investment options against prescribed benchmark portfolios rather than against the trustee’s stated objective for the option and the strategy designed to achieve it. In our view, this is the source of many of the issues identified in the Consultation Paper, including benchmark hugging, reduced investment flexibility, and poor alignment between the test and long-term member outcomes. To rectify these shortcomings, the current performance test framework should be replaced with a model based on trustee-determined return objectives for each investment option, expressed relative to a long-term reference point that is simpler for fund members to understand. This would assess performance against the trustee’s stated investment objective as part of the fund’s investment strategy, rather than against a prescribed benchmark portfolio that may not reflect the design of the product. The same framework should be capable of applying across trustee-directed, single-sector and externally directed options.

Our submission does not respond to the questions proposed in the Consultation Paper directly. Instead, it sets out our view that the issues identified in the Paper are symptoms of a more fundamental design problem: the current test assesses performance against prescribed benchmarks rather than against the objectives trustees set for the investment strategies they offer.