ASFI Submission: Your Future Your Super Performance Test Reforms

ASFI has provided a submission to the Australian Government’s consultation on strengthening the superannuation performance test, which considers potential reforms to the Your Future, Your Super performance test.

ASFI supports reform of the performance test to better align regulatory settings with Australia’s sustainability objectives. The submission highlights that, while the current test has played a role in improving accountability, its design can create unintended consequences, including benchmark hugging and herding behaviour that may limit diversified, long-term investment.

ASFI summary of positions

ASFI recommends the Government consider broader reform of the Your Future, Your Super performance test to reduce the risk of poor member outcomes and system-wide risks created by benchmark-based investment behaviour.

A potential near-term option is to amend the consequences of the performance test to enable APRA to exercise bounded discretion with respect to the consequences of failure.

Option 1: Introducing a new emerging covered assets class

ASFI supports Option 1.1, which would introduce a new emerging covered assets class with a CPI + X benchmark.

This change may help reduce constraints on investment in asset types that are not well reflected in existing benchmarks. However, ASFI notes that this reform is unlikely, on its own, to materially increase investment into areas such as renewable energy, social housing or venture capital. Broader policy settings and incentives will still be needed to address the specific barriers affecting those asset types.

ASFI considers creating a new emerging assets class to be preferable to adjusting the existing Alternatives asset class.

Option 2: Simple Reference Portfolio approach

ASFI recognises that the proposed Simple Reference Portfolio approach has strengths, including its simplicity, focus on overall investment strategy and recognition of differing risk levels.

However, ASFI notes that this approach could create new distortions, including incentivising benchmark hugging and herding behaviour at the asset allocation level. Given the implementation effort required, ASFI does not consider this to be a priority reform at this time.

ASFI recommends that targeted improvements to the existing framework are pursued while broader alternatives to the current performance test model are considered.

Option 3: Routine benchmark review and benchmark flexibility

ASFI supports a routine review of benchmarks by APRA every three to five years.

As a near-term reform, ASFI recommends adding a Paris-aligned index option as a voluntary benchmark for Australian equities and international equities. ASFI also supports shifting benchmarks from regulations into an APRA instrument to allow for more flexible and timely updates.