Morningstar flags declining YFYS failures as review looms

Morningstar has found the Your Future, Your Super test delivering fewer failures, but warned against complacency as regulators review its design.

The firm described the 2025 Your Future, Your Super (YFYS) performance test results as “remarkable for how unremarkable they are”, with the analysis showing another year of negligible failures and renewed debate over whether the regulatory framework has achieved its intended purpose.

Morningstar senior principal Thomas Dutka said the results have raised a central question about the effectiveness of the test.

“With minimal failures overall and a second successive year of zero failures across the two key segments – MySuper and non-platform trustee directed products – members are understandably asking the question: ‘Has the test succeeded in its goal of removing uncompetitive products from the market, or have trustees simply figured out how to maximise their odds of passing it?’” Dutka said.

According to Morningstar’s paper, just seven out of 556 products failed the test this year, representing 0.06 per cent by value.

All failed products were from the small platform trustee directed product (TDP) segment, while the two much larger segments, MySuper and non-platform TDPs, each recorded zero failures for the second year running.

The paper found that the failure rate among products has trended sharply downward since the test’s introduction.

“In 2021, 1 in 14 members within the YFYS universe were in failed products; in 2025, this lengthened to 1 in almost 2,500,” the analysis stated.

Dutka said the test has undeniably lifted standards: “It’s hard to deny that the test has filtered out subpar funds from the sector – 13 of the 14 MySuper options that failed in the first year have since closed, as have most of their parent super funds.

“Just one fund, CFS, has recovered, taking material steps to improve its investment offering – a clear positive for members.

“The threat of test failure has also helped nudge a raft of merger activity as funds seek to generate scale and cut costs. There were 158 APRA-regulated funds in June 2021; today, there are just 89. Meanwhile, fees have continued to trend downward.”

Morningstar’s analysis also found that profit-to-member funds continued to outperform their retail counterparts, helped by lower overall fees.

Larger MySuper options tended to record stronger performance, though with a few notable exceptions.

“Bigger is better – at least most of the time,” the report noted, while highlighting smaller funds such as MIESF and First Super, which both produced leading results despite relatively high administration fees.

In contrast, platform TDP results were “heavily clustered just above the negative 0.5 per cent per year pass mark”.

Morningstar attributed this partly to fee rebates, which, while beneficial for members, have prompted regulatory scrutiny.

“This was partly driven by fee rebates, which, while positive for members, has prompted APRA to engage with relevant trustees about the need for enduring investment performance,” the report said.

Dutka acknowledged that the test’s simplicity has drawn criticism. “Fear of failure has been said to encourage funds to ‘hug’ YFYS benchmarks,” he said, noting that while this may not be the full picture, “its simplicity leaves it susceptible for ‘gaming’ by funds”.

The paper also cited concerns that the test’s narrow benchmark menu can discourage allocations outside mainstream indices and does not account for differences in strategic asset allocation or risk-taking.

The Australian government confirmed in August that the test is now under review, with potential changes expected to align with broader goals of improving productivity and capital investment.

“Regardless of the performance test’s evolution going forward, it is imperative that its focus remains aligned with trustees’ duty to act in their members’ best financial interests,” Dutka said.