An Analysis of the Rationale & Risks for the Australian Your Future Your Super Performance Test

Abstract

The Your Future Your Super reforms introduced in June 2021 include an investment performance test (YFYSPT) for MySuper products initially, but the Australian Prudential Regulatory Authority (APRA) intends to extend the YFYSPT to other superannuation products from 2022. This paper assesses the YFYSPT from the perspectives of achieving market efficiency, providing information that members of superannuation products can use to make informed decisions, and better aligning the member-agent interest. The paper also analyses the sources of risk that might cause MySuper products to fail the YFYSPT. The paper concludes that the YFYSPT is likely to improve market efficiency and reduce the misalignment of members’ and investment managers’ interests but fails to provide a meaningful basis for members to make informed decisions. There are also technical issues in the formulation of the YFYSPT. The major risk of failing the YFYSPT arises from the use of active investment management that does not produce returns net of investment and administration fees and taxes in excess of the YFYSPT indices.