Rest has called for an overhaul of the federal government’s superannuation performance test, arguing its current design discourages funds from investing in emerging asset classes that could deliver stronger long-term retirement outcomes for members.
In its submission to Treasury’s consultation on strengthening the superannuation performance test, the $105 billion fund said it continued to support the policy objective of holding underperforming funds to account but argued the framework needed to become “more sophisticated in assessing and supporting member outcomes”.
“Rest believes that all super funds that manage Australians’ super assets should provide competitive investment performance relative to appropriate benchmarks. There must be clear expectations for fund performance, and consequences for funds that persistently do not meet them,” the submission said.
However, it warned the existing framework was creating unintended consequences by encouraging funds to closely track benchmarks rather than pursue investments in members’ best financial interests.
“The current design of the performance test means super funds face barriers that can prevent them from investing in a full range of opportunities on behalf of members,” Rest said.
“The design of the current benchmarks, combined with the existential consequences for super funds that fail the test, mean that investments in assets not included in the benchmarks or emerging asset classes can be disincentivised.”
Rest proposed introducing a new ‘Emerging Assets’ asset class benchmark based on a CPI+X measure, covering investments that are not well represented by existing benchmarks, including venture capital, residential housing, agriculture and natural capital, and climate transition investments.
It argued the reform would give trustees greater flexibility to pursue long-term opportunities while maintaining appropriate oversight.
“The performance test clearly constrains investment decisions and can deter investment in certain assets,” the submission said, adding the current settings encouraged “‘benchmark hugging'” and discouraged investment in areas that may offer “strong risk-adjusted returns and be in members’ best financial interests”.
The fund also recommended routine reviews of the benchmarks every three to five years by an independent expert panel convened by APRA, with the benchmarks moved from legislation into a more flexible regulatory instrument.
It said benchmarks should not be treated as “set and forget” because markets and investment opportunities evolve over time.
Rest opposed Treasury’s proposal to introduce a risk-adjusted reference portfolio as the primary performance measure, arguing it would replace one form of benchmark hugging with another.
“Option 2 risks turning the performance test from a measure of investment skill into a measure of risk appetite,” the submission said.
The fund also warned such an approach could discourage investment in unlisted assets including infrastructure, private equity and property, while penalising sustainability-focused investment strategies that intentionally diverge from traditional market benchmarks.
Beyond benchmark reform, Rest called for the performance test to be extended to externally directed accumulation products following the collapse of the Shield and First Guardian Master Funds, which it said resulted in losses of around $1.2 billion for almost 12,000 Australians.
The fund said members using those products should receive the same protections as those invested in trustee-directed superannuation products.
The submission also recommended changes to the methodology used to assess administration fees, saying historical fees should be matched with the corresponding year’s investment performance to provide a fairer measure of long-term net returns.
In addition, Rest urged the government to develop a standardised investment product labelling framework, including consistent risk categories and naming conventions, to make it easier for members to compare superannuation investment options.
