Treasury’s Your Future Your Super (YFYS) ‘design options’ consultation paper deserves credit. It demonstrates that Treasury understands the shortcomings of the current test design, and sets out a range of options for change. Now, it’s the industry’s turn to respond. 

This creates a “red pill or blue pill” moment for the super industry to channel a key scene from The Matrix films. The red pill involves facing up to the reality that the current test has major shortcomings, and doing the best possible to design a better test. The blue pill represents a do-nothing option where we remain in the world of the existing test. 

We are sensing a view in the industry that some may prefer to take the blue pill and not make any substantial changes. The train of thought leading to this position is not unreasonable. It is based around consideration of cost to industry and ‘better the devil you know’.  

However, we advocate for the red pill on the basis that what is best for consumers is what matters. And we see an opportunity to improve member outcomes. 

This review makes it clear that the YFYS performance test will be permanent. Some of this is due to the explicit outcomes the test has delivered thus far, along with the associated narrative: funds are being held to account and members have benefited as underperforming funds exit and fees reduced.  

Some of it is undoubtedly down to politics. It would be very difficult for a government to be seen to be reducing consumer protections in superannuation by removing the test.  

Thus, this review is not about removing performance testing. Rather, it is an opportunity to design a better performance test.  

Acknowledging the shortcomings  

The concept of a single-metric, backwards-looking performance test implemented retrospectively is deeply flawed. It runs contrary to some of the messages provided to consumers. It conflicts with all the education and learned experiences of the investment management industry.  

Whatever happened to the adage that “past performance is no guide to future performance”?  

While some might find it cathartic to detail the flaws of the test, it is a necessary starting point for improvement. The main high-level issues with the test are that it is: