Treasurer Jim Chalmers left the Australian Government’s 2025 Economic Reform Roundtable with a stated intention to remove barriers restricting superannuation funds from allocating more capital to nation-building, sustainability and housing. The performance test ‘side pocket’ proposal in the just-released Your Future Your Super consultation paper removes the barrier.

It does not follow that more investment will result. Understanding why requires looking at both sides of the table.

The ‘side pocket’ proposal

The consultation paper proposes adding a new asset class to the YFYS performance test, benchmarked against a Consumer Price Index plus a margin – with the margin itself subject to consultation. The approach acknowledges that emerging assets often carry idiosyncratic risk profiles and that suitable market indices may not exist. As with the rest of the YFYS test, trustees would report their planned strategic asset allocation to this category.

The effect, if adopted, would be to remove a genuine structural impediment. Funds have long argued that the test’s benchmarking methodology penalises allocations to assets – including green infrastructure, social housing and early-stage domestic projects – that don’t map neatly onto listed market indices. The side pocket addresses that problem directly.

Government motivations

The Australian government has, to date, pursued a strategy of encouragement rather than direction when it comes to superannuation investment in domestic priorities. Treasurer Chalmers has consistently walked the line between signalling intent and respecting the industry’s fiduciary obligations.

But the political stakes are clear. The types of activities the government has in mind – housing construction, energy transition, defence supply chains, critical infrastructure –  are areas where private capital has been slow to move at the scale required, and where the government faces significant fiscal pressure to avoid carrying the cost entirely on its own balance sheet.

In this context, it is worth noting the degree to which Australian super funds have been active in promoting their capital internationally – including recent road shows in Washington, London and Paris. For a treasurer watching a pool of capital – created by policy his predecessors initiated more than 30 years ago – deploy actively offshore while domestic priorities go underfunded, the frustration must be sizable.

Compelling investment opportunities?

But removing a barrier is not the same as creating an incentive. Superannuation funds operate under a best financial interests duty to members. Investments must compare favourably on a risk-adjusted return basis against the alternatives available, regardless of whether those alternatives happen to align with the government’s policy priorities.

The Conexus Institute has previously examined this dynamic in the context of sustainable investments (here) and the same logic applies here. Our view is that if the risk-adjusted returns from nation-building investments were sufficiently attractive, funds would already have found ways to accommodate them within their portfolios, performance test or no performance test.

That is not an argument for inaction. Removing the structural barrier is a helpful step. But the more important step is a substantive conversation between investors and government about what it would take for these opportunities to clear required hurdle rates, and whether the government is prepared to take actions, including co-investment, concessional financing structures or demand guarantees, to help them do so.

The poker game

Which brings us to the question neither side has fully answered.

Have super funds been using the YFYS performance test as a convenient excuse – readily cited, rarely interrogated – while the underlying reality is that the returns simply haven’t been attractive enough? Or have they consistently communicated a genuine two-stage pathway: first remove the barrier, then create the conditions for investment-grade returns?

Treasurer Chalmers, by moving on that barrier, has now called that position. If significant capital flows do not follow – and our view is that they will not follow on the strength of barrier removal alone – the conversation will need to shift to the second stage: what the government is prepared to offer to bring these opportunities to the required standard.

The funds will need to say clearly what that looks like. And the government will need to decide how much it is willing to put on the table.