Treasury is considering sweeping changes to the Your Future Your Super performance test to discourage the benchmark-hugging behaviour that has characterised super fund investments since the introduction of the test in 2021.

“While the performance test has played an important role in improving outcomes for members, aspects of the current design may be discouraging investment in some sectors that could deliver strong, long‑term returns,” Treasurer Jim Chalmers said in a statement.

“There are also opportunities to modernise and strengthen the performance test, including to ensure the coverage of the test keeps pace with the evolution of the superannuation sector and provides strong protections in light of the collapse of Shield and First Guardian.”

Proposed changes to the test would see the creation of a new “CPI + X” per cent benchmark for “emerging and alternative asset classes”, including venture capital, renewable energy projects and social and affordable housing, which all have return characteristics “not well captured by existing market indices”.  Under that option, Treasury has also proposed the inclusion of an allocation cap as an additional safeguard.

“A key concern raised by stakeholders is that the test encourages ‘benchmark hugging’, as trustees invest more closely in line with the benchmark indices to manage the risk of failure,” Treasury wrote in the consultation paper, titled Strengthening the superannuation performance test.

“In their view, this discourages investment in assets that are not well represented by the benchmarks and limits trustees’ ability to pursue longer-term investment opportunities in members’ best financial interests.”

Another option would see the existing alternatives benchmark – which currently comprises a 50/50 split between international equities and international fixed income, with a 75/25 split for ‘growth’ alternatives and the reverse composition for ‘defensive’ alternatives – broadened to include more assets or refined by changing the asset class mix, weightings or underlying market indices.

“While both options are intended to improve investment flexibility, they are unlikely to fully address concerns about benchmark hugging,” the paper says. “Neither option introduces changes to how administration fees and expenses are calculated in the test.”

The changes come amidst an ongoing push from the government for super funds to get involved in nation-building investments, but it’s not clear that the creation of a new benchmark or changes to the existing benchmark would be enough to push super funds, which are highly sensitive to both their own returns and the returns of their peers, to invest in areas like social and affordable housing without the government or other parties first de-risking them.  

“I’ve got one job and one job only… we’ve got to be hard-headed,” an industry source said. “Soft hearts don’t make for happy retirements.”

A spokesperson for the $100 billion profit-to-member fund Rest said that the current design of the test “may inhibit super funds from investing in the full range of value-generating opportunities in members’ best financial interests”.

“Therefore, a more refined approach to evaluating the performance of emerging or alternative asset classes could support greater financial outcomes for our members,” the spokesperson said. “Rest strongly supports the value of the superannuation performance test and we welcome the opportunity to contribute to its reform. We are carefully considering the detail of the proposals.” 

A new YFYS
A more sweeping proposed change would see the existing strategic asset allocation benchmark approach thrown out in favour of a simple reference portfolio, which would keep the test “simple and manageable to administer” while taking a step towards better assessing risk adjusted returns.

“By reducing reliance on asset class benchmarks, this approach could more directly address concerns about benchmark hugging and unintended investment constraints. This includes for assets that are not well aligned with existing benchmarks.”

Industry sources pointed to that change as having significantly more impact on how super funds invest, with funds likely to be taking much more active risk against what could be a “simple bundle of listed betas” – especially those with large allocations to illiquid assets. But Financial Services Council chief executive Blake Briggs said his members are concerned a simple reference portfolio approach “could water down the test if it reduces accountability for superannuation funds”. 

“Any reform must preserve the integrity of the test and maintain pressure on funds to deliver for consumers.”

Briggs said the FSC supports targeted changes to the test but opposes structural reform. 

“A ‘CPI + X’ benchmark for a limited portion of portfolios would provide funds with greater flexibility to invest in alternative assets that align with Australia’s national priorities, with the continued safeguard of the best financial interests duty.”

Treasury is also canvassing whether it should regularly review the YFYS benchmarks and expand the test to single sector, retirement and “externally directed” products – which it defines as “diversified accumulation products [that] differ from trustee-directed products in that neither the trustee nor its connected entities are involved in designing or implementing the investment strategy”.

Treasury said that stakeholders have raised concerns that, while the performance test currently applies to more than 560 products (representing around 62 per cent of member benefits in APRA-regulated funds) many products remain outside its scope.  In 2025, APRA research found that 35 per cent of non-platform externally directed products were underperforming the test, and Treasury said that gaps in coverage “may become more significant as the landscape of the superannuation system evolves”.

“Recent events have further highlighted these limitations. The collapse of the Shield and First Guardian Master Funds, which were managed investment schemes distributed through superannuation platforms, has drawn attention to the exclusion of externally managed products from the test.

“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.”

While MLC Super broadly welcome the proposed changes, it cautioned against extending the performance test to retirement products in its current state.

“A test designed for the accumulation phase does not take into account the nuances of an individual member’s retirement, and the fact that retirement is more than just a product,” said MLC chief customer officer Renee Howie.