Trustees could be better placed to invest in venture capital, renewable energy, and social or affordable housing 10 min read
Treasury has taken a meaningful step toward addressing long-standing industry concerns that the current performance test discourages trustees from making investments in certain asset classes, including venture capital, renewable energy, and social or affordable housing.
The policy intent is welcome, but there is critical work required to bed down the details of the new proposals. In a regime where small shifts in test calculation can have existential consequences for trustees, the maths matters.
In this Insight, we look at the implications of each reform option and explore the implementation issues.
Key takeaways
- The Strengthening the superannuation performance test consultation paper (the Paper) calls out the unintended consequences of the current superannuation performance test including benchmark hugging.
- The Federal Government will not be 'watering down' the test; but have proposed targeted refinements aimed at increasing superannuation investment in venture capital, renewable energy and social or affordable housing.
- Designing a performance test that accommodates diverse asset classes, fund structures and fee arrangements, while preserving rigour and comparability, is fundamentally complicated.
- Treasury is seeking feedback on the options it has put forward in the Paper —submissions close 19 June 2026.
Background and the case for reform
Following the Government's Economic Reform Roundtable last August, Treasury released the Paper, seeking feedback on four options to 'strengthen' the superannuation performance test. Submissions close on 19 June 2026.
The 2026–2027 Budget also commits to strengthening the test, to reduce unintended barriers to investment that supports member outcomes.
Importantly, Treasury acknowledges long-held industry concerns that the current performance test may discourage investment in sectors where benchmarks (based on an investment option's performance against a relatively simplistic set of industry indices) are ill fitting. The Paper calls out, in particular, the effect of the current test on investments in venture capital, renewable energy and social or affordable housing, accepting that the current indices the test uses to benchmark performance do not align well.
In our view, this is a constructive development for the superannuation investment industry. A more calibrated test could broaden investment opportunities in asset classes that sit uneasily within the current framework, specifically venture capital, renewable energy, and social or affordable housing, where current indices do not neatly align.
That said, the Government has no intention of 'watering down' the test: the consequences of failure remain severe, there are no broad exemptions, and more products are likely to be brought within its scope. These are targeted refinements aimed at better capturing investment skill and long-term value creation.
For stakeholders other than superannuation trustees, the takeaway is simple (and you can probably stop reading here): if the reforms work as intended, trustees should be better positioned to invest in less traditional asset classes where the underlying economics support it. All things being equal, that should (and it seems the Government's policy is deliberately intended to) increase superannuation investment in those sectors.
However, as is often the case in superannuation policy, the challenge is translating that ambition into workable rules. Designing a test that accommodates diverse asset classes, fund structures and fee arrangements, while preserving rigour and comparability, is inherently complex.
Options 1 & 2: core (and alternative) proposals to deal with index hugging
The Paper’s reference to four 'Options' for consideration is somewhat inapt. Only Options 1 and 2 represent competing approaches to reforming the performance test, whereas Option 3 seeks to ensure the test remains fit for purpose over time, and Option 4 considers whether its current coverage remains appropriate.
Options 1 and 2, where the true potential reforms of the performance test lie, offer two very different approaches to fixing the index-hugging problem:
- Option 1 is an evolution of the current framework: targeted adjustments that create a new 'emerging covered asset' class, with a new—hopefully, more appropriate—benchmark for relevant investments.
- In contrast, Option 2 is a far more fundamental shift: effectively a complete redesign of the test that moves away from benchmark-based assessment, towards a new model that assesses total portfolio returns of an investment product against a notional risk-adjusted benchmark.
While the mechanics are undeniably complex, understanding how each approach functions day to day is critical to assessing whether either proposal meaningfully addresses the issues Treasury has identified.
Option 1: retain existing test methodology with an adjustment of how relevant assets are measured
Option 1 has two sub-options. Both largely retain the current test’s design while tweaking how it measures performance for the asset classes that the reforms target.
Option 1.1: introduce a new emerging covered asset class
Option 1.1 introduces a new 'emerging covered asset' class, where relevant assets (see below) are assessed against a Consumer Price Index (CPI) + X threshold, with X being a fixed margin above CPI. Assets forming part of this new class would be removed (for performance test purposes) from their current asset class (and, therefore, from associated indices used to assess performance of those asset classes) and instead be tested only against the CPI + X benchmark.
A cap, suggested to be up to 5% of a product's total strategic asset allocation, would limit the value of assets a trustee could allocate to the new class and is intended to mitigate gaming risks.
The Paper suggests 'X' (presumably to be determined by Parliament or the Australian Prudential Regulation Authority from time to time) should account for prevailing market conditions, and, ideally, reflect the expected return profile of eligible investments.
As to which assets could sit in this new class, the Paper proposes 'clearly defined criteria' based on factors such as the nature of the asset or sector, the risk and return profile, whether performance is better assessed against a CPI + X benchmark, limited market depth, lower market maturity, or the absence of a well-established and investable benchmark index.
The Paper also suggests the CPI + X benchmark could be an interim measure for certain investments, until more suitable market indices emerge. For example, venture capital investments could initially be assessed on that basis, before later moving into the relevant equity asset class as they mature or as more appropriate indices are developed.
As with the other options, Option 1.1 raises design questions that will be determinative in practice. Key initial questions include:
- The nature (and clarity) of the eligibility criteria for assets allocated to the proposed 'emerging' asset class bucket Given the Paper's limited guidance on this, much will turn on whether the criteria are tightly prescribed by reference to objective measures, requiring consistent treatment of all qualifying assets, or instead leave trustees a degree of discretion, either deliberately or inadvertently, to designate part of their portfolio (eg up to any cap) as 'emerging'. Given the latter approach provides greater flexibility in an industry full of individualistic investments and investment structures, such an approach may be preferred; however, it obviously raises questions around comparability and potential gaming.
- The size and nature of any cap The Paper’s example of up to 5% appears somewhat arbitrary, and the right cap will depend in part on how tightly eligibility criteria are defined. There is a real question whether a fixed percentage is the right mechanism at all if genuinely objective criteria are set, though it may be more appropriate if trustees retain discretion as to which assets to allocate to the class.
- The calibration of the required return (expressed as CPI + an additional margin) If that margin is too high, trustees may not use the category at all; if it is too low, there is a real risk that capital may be shifted into the bucket in a way that undermines the integrity of the overall test.
Option 1.2: improve the existing Alternatives covered asset class
Option 1.2 represents perhaps the least dramatic proposed option—to reform the existing Alternatives covered asset class by:
- broadening the types of assets that are included;
- updating the composition of existing benchmarks (eg by changing to asset class mix, weightings or underlying market indices), particularly for investments with characteristics that differ from traditional alternatives; and/or
- replacing existing benchmarks with new, more appropriate benchmarks (eg the existing composite benchmark for the three Alternatives categories could be replaced with a CPI + X benchmark).
This is clearly a more modest (and perhaps less effective) change than Option 1.1 or Option 2, though it has the attraction of greater simplicity.
While conceptually simpler, though, it is more than likely that a lack of commonality between asset types in question (ie the risk-return profile of a typical venture capital investment is very different from that of a renewables asset), and the paucity of robust indices for those asset types, means any reforms under Option 1.2 will be a blunter instrument than the Paper's other proposals.
Option 2: introduce an assessment of risk-adjusted returns
Option 2 is a significant departure from the current methodology.
The current test measures investment performance of an investment option relative to the expected return (based on selected indices) of a theoretical reference portfolio with the same strategic asset allocation benchmark mix. Option 2 proposes instead to assess total portfolio returns of an investment option against a risk-adjusted benchmark.
Under this approach, a product's total portfolio risk-adjusted return would be assessed against a hypothetical low-cost passive reference portfolio with a comparable level of risk, measured by volatility (as a proxy for risk). In further detail:
- Reference portfolio: first, a notional reference portfolio would be explicitly defined using a limited mix of defensive and growth assets, measured by well-established indices (eg cash by the Bloomberg AusBond Bank Bill Index and equities by the S&P/ASX 300 Total Return Index) or an appropriate international equity benchmark.
- Benchmarking performance: then, an investment option's returns would be compared against the return expected from a reference portfolio having a similar level of risk (measured by volatility). This effectively asks whether the option has delivered appropriate returns for the risk taken.
Consistent with the current test, returns would be measured over a ten-year average period after investment fees. A product would fail the test if its overall performance, together with administration fee performance, fell more than the allowed margin below the benchmark (currently set at minus 50 basis points, though that may change under the new approach).
Option 2 would mark a substantial departure from the status quo, moving away from model benchmarks towards a more holistic assessment of whether a trustee is delivering value for the risk taken on behalf of members.
There is intuitive appeal in that objective, particularly given the limitations of the current benchmarks. However, in its current form Option 2 appears relatively underdeveloped (although, as humble lawyers, we admit that this proposal is inherently less accessible to those without an actuarial or quantitative background, making its practical operation harder to interrogate at this stage).
Therefore, while the conceptual direction of Option 2 may have merit, our initial observation is that it would require significant further development and consultation with industry to ensure a redesigned test does not create a new set of unintended consequences in place of the old ones.
Option 3: introduce a routine review of the benchmarks
As a supplement to Options 1 or 2, the Paper proposes a routine review of the test benchmarks to assess whether settings remain fit for purpose over time. It envisages government-led reviews, informed by technical experts and industry representatives, every three to five years.
While regular benchmark updates may create uncertainty for trustees, we consider regular reviews are both reasonable and essential, given the pace of change in investment markets and the current test’s unintended consequences.
Option 4: test externally directed accumulation products
Finally, and potentially more controversially for some parts of the sector, the Paper considers extending the existing performance test to 'diversified externally directed products' in the accumulation phase.
At present, the test applies only to a subset of superannuation products: MySuper products and 'trustee directed products'. Retirement products and many platform-based products therefore remain outside the regime.
The Paper contemplates expanding the test to 'externally directed products' (though not, at this stage, pension products), which would substantially increase the number of products captured (up to an additional 7,500 across 37 superannuation entities), the majority being platform-based offerings. Given this would include products such as separately managed accounts, often with mixed underlying investments, where members exercise greater control over investment decisions, it raises complex issues.
The key issue is the scope of what will (and won't) fall within the new concept of 'externally directed products'. On this, the Paper provides limited detail. Although the proposal looks straightforward at first glance, Option 4 is likely to be contentious in practice.
The implications of an extension of the test will vary significantly across the industry. For entities already operating within the test, a broader scope may improve consistency and comparability. For those currently outside it, being brought into the regime raises practical and commercial questions about how performance is measured, fees are treated and different product structures are accommodated.
Given those dynamics, we anticipate Option 4 will elicit a variety of responses. At this stage, the Paper is largely exploratory, and much will depend on the detail of how any expansion in scope is implemented.
Next steps
Treasury has posed 21 questions on the four reform proposals in the Paper. Submissions close on 19 June 2026.
If you are considering a submission, or would like to understand more about how the proposals may affect your business, please get in touch with us.