Australia: Preparing for the Extension of the Superannuation Performance Test to Trustee-Directed Products

By Jim Bulling and Grace Hall

The release of draft regulations by the Australian Government and publications by the Australian Prudential Regulation Authority (APRA) provide further guidance to regulated superannuation funds on how annual performance assessments (the performance test) will apply to trustee-directed products.

Trustee-directed products largely encompass accumulation choice products with strategic asset allocations to more than one asset class. Certain products are excluded, including those where a trustee does not manage the investment strategy and the setting of strategic asset allocations of the product. APRA will undertake its first annual performance assessment of trustee-directed products from 1 July 2023.

In April 2023, the Australian Government released draft regulations which aim to ensure the performance test is “fit for purpose” to apply to trustee-directed products, as well as addressing some other issues. In respect of product history, the draft regulations extend the lookback period from 8 to 10 years, with the intention to incentivise trustees to focus on long term decision making. In addition, the draft regulations allow APRA to combine part quarter data for the calculation of the ‘actual return’ and ‘benchmark return’ in order to promote accuracy in the assessment of products that change over time.

Subsequently, APRA released an information paper on its approach to combining product histories for trustee-directed products. In administering the performance test, APRA has the power to combine the performance history of two or more products. APRA will apply largely consistent principles and methodology to trustee-directed products that it applies to MySuper products. In its paper, APRA acknowledges the substantive differences between MySuper and choice products and says that it will apply a “varied approach” for trustee-directed products as a result. APRA has updated its FAQs on the performance test to reflect this guidance.

The introduction of the performance test for MySuper products has proved to be challenging for superannuation funds and at times controversial. The extension of the performance test to trustee-directed products will no doubt result in a number of new challenges for superannuation funds.