The first proposal would create a new emerging covered asset class to accommodate investments whose risk and return characteristics are not well captured by existing market indices. The new class would be benchmarked against a CPI + X target — a fixed margin above the consumer price index.

Eligibility would be determined by reference to defined criteria, such as limited market depth, lower market maturity, or the absence of an investable benchmark index, rather than a prescribed list of specific assets. The intention is to avoid the need for ongoing legislative amendments as investment practices evolve.

From a practical standpoint, creating a new asset class would impose additional administrative burden on trustees and investment teams. While the paper promotes broadly defined eligibility criteria, doing so may create categorisation difficulties for superannuation trustees. 

The second limb of Option 1 takes a less interventionist approach. Rather than creating a new asset class, it would refine the existing 'Alternatives' covered asset class. Refinements could include adjusting the weighting between equities and fixed income, incorporating different underlying indices, or broadening the range of assets that qualify as Alternatives.

However, the consultation paper acknowledges that continued reliance on market indices as a proxy for alternative investment performance may not fully address the underlying concern, particularly for assets whose returns are not closely correlated with listed markets.

Rather than retaining the existing approach of measuring performance against a strategic asset allocation benchmark portfolio (which measures implementation skill against the product's own chosen investment strategy), this proposal would assess a product's total return against a hypothetical passive portfolio exhibiting the same level of risk. The mechanics are as follows:

• A simple reference portfolio would be constructed from a small number of well-established asset class indices — for instance, cash (Bloomberg AusBond Bank Bill Index) and equities (S&P/ASX 300 or an international equivalent).
• By varying the weights between these components, a continuous spectrum of portfolios is generated — each representing a different risk/return combination. This spectrum is referred to as the 'simple reference portfolio frontier'.
• A given product's return is then compared to the return of the point on the frontier that matches its observed level of volatility, which acts as a proxy for risk.

This approach would directly address the benchmark-hugging concern because the Test would no longer compare each asset class in isolation against its own index. A product that takes on material risk but fails to deliver commensurate returns relative to a passive alternative would still be identified as underperforming, regardless of its asset allocation choices.

This proposal is less a standalone reform than a structural governance mechanism. Benchmarks used in the Test would be subject to periodic reassessment (potentially every three to five years), focusing on whether existing benchmarks remain suitable. The review would be led by government, with the support of an expert working group.

While the principle of periodic review is sound in principle, there are strongly-held political and policy views regarding the operation and scope of the Test. Reviews at any interval may not be driven by or concluded with policy consensus, and may result in counterproductive uncertainty for trustees.

The Test currently applies to approximately 62 per cent of member benefits in APRA-regulated funds, but many products remain outside its scope. In particular, the Test does not apply to retirement phase products or externally directed accumulation products (being products underpinned by a strategy or design implemented by a third party).

The scale of the proposed extension is significant. APRA data suggests that up to 7,500 additional products across 37 entities could be captured, the majority offered through platforms. This includes approximately 3,500 single- or multi-manager products and around 2,700 model portfolio products (separately managed accounts).

As to retirement products, the Retirement Reporting Framework (due to commence publishing data from 2028) would provide a foundation for any future retirement-phase test, likely requiring a modified methodology that accounts for income sustainability and flexible access to funds. 

The consultation paper does not argue that the Test should be extended to cover self-managed super funds (SMSFs), despite noting that 25% of the total assets in the superannuation system are held through SMSFs. This maintains a notable asymmetry in the regulatory framework – members who elect to remain in an APRA-regulated product are increasingly likely to be protected by the Test; but there is no equivalent scrutiny of whether or not an SMSF's investment performance is achieving optimal member outcomes.