The Annual Superannuation Performance Test (the performance test) was introduced to protect Australians’ retirement savings by holding trustees to account for the investment performance they deliver and the fees they charge.
The investments and reforms made today will shape both members’ retirement outcomes and the economy they retire into.
To date, the performance test has successfully improved accountability and protected members from short-term underperformance.
As Treasury considers the next phase of reform, it could seek to preserve these protections while ensuring members can participate in investment opportunities that support long-term returns, economic resilience and better retirement outcomes.
Climateworks Centre supports the Treasury’s proposal to introduce an emerging asset category and establish a routine benchmark review process.
Together, these reforms provide an opportunity to modernise the performance test while maintaining its core objective of protecting members from underperformance.
However, we believe, the greatest opportunity is not the addition of a new benchmark, but the establishment of a framework that allows the test to evolve as investment opportunities, markets and data mature over time.
This framework can create a pathway for the incorporation of forward-looking indicators alongside traditional measures, to support investors to deliver their members’ long-term best financial interests.
Investors increasingly require information that provides insight into future risk, opportunity and competitiveness, alongside traditional measures of performance. The benchmark review framework could provide a pathway for incorporating these forward-looking indicators into benchmark methodologies.
The introduction of an emerging asset category and a routine benchmark review process are complementary reforms. The emerging asset category addresses current gaps in benchmark coverage, while the review framework provides the mechanism for benchmarks to evolve as markets, methodologies and data mature over time.
One without the other risks either failing to address current investment constraints or creating a static solution to a dynamic challenge.
Summary of recommendations
- Establish optional emerging asset subsets within existing asset classes to better accommodate investments that are not well represented by current benchmark methodologies, including large-scale renewable energy projects and other emerging opportunities.
- Permit a basket-of-indices benchmarking approach using a representative median return, consistent with the principles underpinning the Benchmark Representative Administration Fees and Expenses (BRAFE) methodology for funds choosing to use an optional emerging asset subset, where at least three qualifying benchmark methodologies exist.
- Use a CPI+X benchmarking approach for funds choosing to use an optional emerging asset class subset, where suitable market indices are unavailable or do not meet minimum benchmark requirements.
- Establish a benchmark review framework overseen by APRA and supported by a technical expert working group that oversees the evolution of the emerging asset subset alongside overall fit of benchmarks within the performance test, including eligibility criteria and establishing minimum requirements for benchmark methodologies that incorporate forward-looking indicators into benchmark design.
- Review the consequences of failing the performance test to ensure they remain proportionate to the policy objective of protecting members from persistent underperformance.
More detail can be found in our submission [PDF 0.2mb].