Your guide to the superannuation performance test

Why do we need the superannuation performance test, how does it work and what do its results mean?

• To help fund members have confidence that their default MySuper product is a good performer, the government in 2021 introduced a special annual investment performance test.
• The test measures how the fund has performed against a range of asset class benchmarks, not whether it's achieving its objectives or meeting its members' expectations.
• Funds that fail the test two years in a row can no longer accept new members.
• In 2023 the government expanded the performance test to cover diversified investment options members choose themselves, in addition to MySuper products.

One of the biggest fears most super fund members have when choosing their super fund is whether they will select a good fund. And one of the biggest aspects of this is choosing a fund that will achieve good investment performance.

To help fund members have confidence that their super fund is a good performer, in 2021, the government introduced a special annual investment performance test, which every super fund that offers a default MySuper product has to pass.

The test in 2023 was expanded to cover other 'trustee directed' investment options too, that is, diversified balanced and growth options that are run by the fund's trustee.

The performance test is high stakes.

If a fund has a MySuper product option or Trustee Directed Product that fails the test it has to notify all its fund members within 30 days of being told it failed.

If it fails the test two years running, it will not be allowed to accept new members into the option that failed and will likely have to merge it with another option or the fund itself may be pressured to merge with another one.

To force the superannuation regulator, the Australian Prudential Regulation Authority (APRA), to introduce such a test, its conditions and rules were written by the Commonwealth Treasury department.

The formulae it uses were directly written into the law - meaning the test and how it works can't be easily changed.

How the performance test works

APRA conducts the performance test every year between June and August.

The test compares every MySuper product or Trustee Directed Product's actual financial year returns, net of fees, over the past eight years against what APRA expected the fund should have at least achieved based on the mix of its assets and the benchmark returns of those asset classes.

To make these comparisons, APRA uses an agreed set of benchmarks to judge each asset class. The benchmarks APRA uses for each asset class are listed in the table on the next page.

What if a fund fails the test?

If a super fund has a product that failed the performance test it has to tell its members and explain to them what it intends to do to improve its performance.

It also has to advise fund members to check the Australian Taxation Office's (ATO) super fund comparator website, which is a special website set up by the government to show fund members how their fund is going.

Is your fund a dud if it fails the test?

Not necessarily, but it's not a good sign.

APRA should have developed a super fund performance test years ago. Because it didn't, the government got tired of waiting for them to do it so they forced their hand. That's why this performance test was designed by politicians and Treasury officials, not super fund investment experts.

The test has meanwhile been criticised because it ignores your fund's ethical, sustainability and governance (ESG) investment goals, investment objectives, its risk-adjusted investment performance and the age profile of its members.

Nevertheless, funds that had MySuper investment options that have failed the test have in most cases not recovered. For example, since the MySuper test was introduced in 2021 the number of these products has fallen by one-third. Rainmaker expects the Trustee Directed Product test will have a similar impact on the retail funds and platforms that failed their test in 2023.

Analysis by Rainmaker revealed that 16% of Trustee Directed Options offered through retail super funds assessed in 2023 failed and 25% of those offered through platforms failed. Only 1% of those offered by not-for-profit funds failed.

Regardless what we think of the performance test, fund members should pay close attention if their fund offers products and investment options that fail it.