A Treasury consultation paper on strengthening the Your Future Your Super performance test, released last week, makes a convincing case for extending the test to retirement-phase products.

But Treasury has decided against extending the annual superannuation performance test to decumulation products, at least for the time being. It cites the “distinct characteristics” of the drawdown phase, a lack of sufficient data to design a test that would not produce unintended consequences, and the looming Retirement Reporting Framework as justification.

The consultation, which closes on 19 June, proposes four reform options for strengthening the test. None of them currently applies to the approximately $500 billion in assets held across around 1.4 million member accounts in retirement products within APRA-regulated funds.

But nowhere is the case for including retirement products stronger than in the statistic that 128 of 140 accumulation-phase products, or 91 per cent, that failed the performance test also had retirement-phase equivalents, but members in those equivalent retirement products were not required to be notified.

They were not subject to the same accountability that applies to their accumulation counterparts, which are sometimes products managed by the same trustee and built on the same underlying investment strategy.

Treasury acknowledges this very inconsistency and says the gap raises questions about the consistency and effectiveness of the test as a truly system-wide accountability mechanism. However, it has put off tackling those issues until 2028 at the earliest, which is when the Retirement Reporting Framework kicks in. 

One of the aims of the framework is to produce consistent data on retirement phase products and member outcomes.

“When considered alongside APRA’s Quarterly Superannuation Product Statistics, the framework will provide valuable insights into member behaviour and retirement outcomes to help track progress lifting performance across the industry,” the paper says.

Treasury says deferring the inclusion of retirement products is appropriate because the decumulation phase of super presents product design challenges that the current test is not equipped to handle. 

“While elements of the existing test may be applicable to account-based pensions, the design and scope of any test should be calibrated to support innovation in retirement products and appropriately balance other retirement priorities,” the paper says. 

Those priorities include “maximising expected income, managing risks and ensuring flexible access to funds”, objectives that sit alongside, rather than within, the investment return and fee framework the existing test applies.

“This may require a modified form of testing that better reflects the needs of retirees, such as flexible access to funds and income sustainability during retirement,” the paper says.

The scale of what is left out

Members aged 55 and over now hold more than half of total APRA-regulated assets. An estimated 2.5 million Australians are expected to transition from accumulation into retirement over the next decade.

The test currently applies to more than 560 products, representing around 62 per cent of member benefits in APRA-regulated funds. All retirement-phase products remain outside it.

The 128 accumulation products that failed the test between 2023 and 2024 and which also offered retirement phase equivalents illustrates the practical consequence of that gap. 

The paper cites analysis by Super Consumers Australia finding that members in those equivalent retirement products were not legally required to be notified of the failure. The paper notes that while “the test cannot predict such failures, broader application could provide greater transparency and scrutiny of performance in parts of the system that are currently untested.”

The coverage gap may also widen over time. The paper notes that research by The Conexus Institute* shows superannuation platforms have experienced increased competitive inflows, “indicating they are playing an increasingly important role in member outcomes and market competition.” 

The paper says that “as a growing share of member retirement savings flows through platforms, the proportion of products outside the scope of the test may be growing too.”

The paper says any future performance testing of retirement products “could be informed by data collected through the Retirement Reporting Framework and other APRA data collections.” 

“A well-designed framework would seek to improve outcomes for retirees while avoiding unintended consequences, including inhibiting innovation of retirement income products,” the paper says.

The paper raises the question of whether performance testing retirement products could create risks to broader retirement income objectives and how those risks might be mitigated, as well as what the key considerations are in extending the test to retirement products.

*The Conexus Institute is a not-for-profit think-tank philanthropically funded by Conexus Financial, the publisher of Retirement Magazine.