Former Minister for Superannuation Jane Hume and Former Treasurer Josh Frydenberg who oversaw the implementation of the YFYS test.

On budget night in October 2020, as policymakers around the world still scrambled to respond to the pandemic’s first wave, Treasurer Josh Frydenberg blindsided the financial services industry (and press) with a major and unexpected reform package on superannuation.

In a 40-page glossy that accompanied the budget documents, Treasury laid out its four-pronged plan to cut fat from what it said was a bloated superannuation sector, acting on many of the Productivity Commission’s recommendations from a few years prior. Chief among them was a new mandatory performance test that would be applied to default MySuper funds, assessing their performance against a tailored basket of indices based off the fund’s strategic asset allocation.

Though the test has its critics – especially in its original incarnation, which many said had a bias towards listed and passive investments – it is hard to argue that the reform has not met its stated objective.

Grattan Institute research found that the fees of members in products that failed the test in its first two years subsequently fell on average by 20 per cent, saving more than $100 million a year.

Just one MySuper fund (AMG MySuper) failed the 2023 test (the results of which were released on Thursday), down from 13 in 2021 and five last year.

Of these statistics, the previous Coalition government should be proud. Indeed, it is arguably the biggest achievement of a decade in politics not noted for landmark reform.

But the extension of that test from default MySuper funds to the far more complex so-called trustee directed products, which occurred for the first time in this year’s test, is more problematic.

Almost 100 of these products failed the test on their first assessment, of which the majority were linked to wealth management administration platform or wrap providers, and a large number owned by the two largest ASX-listed wealth managers, AMP and Insignia Financial.

As a result, members around Australia will from today begin receiving scarily worded letters from their trustee warning (at APRA’s insistence) that they are invested in a product that has failed and “should think about moving your money to a different super investment option or fund”.

The problem is that many or even most of these members, especially those in the 76 platform products caught out by the test, there is an existing adviser relationship in play, certainly at the time of transaction and often ongoing.

These advisers may well have good reason to keep their clients invested in these mostly legacy products. For example, their exit from this product may be met with a significant tax event that may neuter the benefits of moving to another fundor there may be a specific ethical overlay, diversification or risk management benefitdeemed appropriate to the client’s specific goals or financial plan and not recognised by the test’s design

But to these clients, the clear implication of the letter will be that they received shoddy advice, even if that is not the case. Some may read it as an invitation to sack their adviser, not the provider of the investment option or fund.

Given most of these products are relics being renovated or wound up anyway, it is not the trustees who are really being punished by the suggestion to move members. AMG for example has already been closed to new members since last year.

Instead, it is advisers who will bear the brunt of a regulatory enforcement campaign arguably designed for product providers.