Mal Washer (Moore, Liberal Party) Share this | Hansard source

The Future Fund Bill 2005 gives effect to the government’s commitment to establish a dedicated financial asset fund—the Future Fund—to meet unfunded superannuation liabilities. By accumulating assets to meet liabilities that will become payable at a time when spending pressures associated with an ageing population are likely to hit, the fund will strengthen the Commonwealth’s long-term financial position.

Currently estimated at $90 billion, unfunded public sector superannuation is the largest single liability on the government’s balance sheet. Four Commonwealth superannuation schemes account for 95 per cent of current unfunded superannuation liabilities: the Commonwealth Superannuation Scheme, the Public Sector Superannuation Scheme, the Military Superannuation and Benefits Scheme, and the Defence Force Retirement and Death Benefits Scheme.

To restrict the growth of these unfunded liabilities, most of these schemes have been closed to new members. The only significant Commonwealth government defined benefit superannuation scheme to remain open to new members is the Military Superannuation and Benefits Scheme. A defined benefit scheme is one which pays a benefit calculated upon a member’s salary and their years of service, or a similar formula.

The bill outlines proposed measures in relation to governance, management, funding, investment policies, taxation and the treatment of the Future Fund in the budget. Governance of the Future Fund will be overseen by a Board of Guardians—not directors, as would be the case in a commercial entity. However, the governance arrangements for the board are substantially the same as the duties of directors under the Corporations Act.

The board will consist of a chairman, Mr David Murray, who was formerly the long-serving CEO of the Commonwealth Bank, and six part-time members. It will be a body corporate, having a separate legal identity from the Commonwealth, and it will make investment decisions independently. It will have a statutory responsibility to manage the investments of the fund and it will hold these investments in its own name; however, the Commonwealth will retain beneficial ownership of the fund’s assets at all times.

The Future Fund Management Agency will be responsible for the operational activities associated with the investment of the fund and will also provide executive support for the board. The costs of running the agency will be met from the fund; however, it will still be subject to scrutiny through the budget and estimates process.

Initial funding will be a transfer of $18 billion from the Reserve Bank of Australia. Further funding will be through realised surpluses and proceeds from asset sales. The government may also transfer some of its remaining equity in Telstra to the fund. Detailed investment decisions will be left to the board.

However, the bill provides a framework for those decisions by setting a benchmark for long-term returns and outlines restrictions such as: the fund will invest only in financial assets, including overseas financial assets, such as shares and bonds. It will not directly invest in property or infrastructure. However, it will be able to invest in pooled property and investment vehicles that do invest in these types of assets. It will not take control of listed companies or unlisted companies with more than 50 members. It will invest in a wide portfolio of financial investments. It will exercise its voting rights in relation to companies in which it holds shares, and it will not borrow, except for short-term borrowing associated with the settlement of transactions.

Strategic guidance will also be provided to the board through an investment mandate by relevant government ministers. The board may make a submission on the draft directions given to it, which will also be tabled in parliament, along with the final investment mandate. The investment income of the fund will not be subject to income tax, nor will the transactions of the fund be subject to a state or territory tax law, such as stamp duty, if the Commonwealth is not subject to that law. It will, however, be subject to notional fringe benefits tax and goods and services tax. Fund earnings will be recorded on the government’s balance sheet but will be excluded from the underlying cash balance, as they are precommitted and not available to meet current payments.

There has been a fair amount of discussion on whether a fund to meet future demands should be established. Before this matter is discussed, we need to keep in mind a couple of important aspects. It is estimated that the public sector superannuation liability will be up around $140 billion by 2020. The government has experienced a period of strong cash surpluses and this is expected to continue over the next 10 years. However, from 2014 to 2015 the federal budget is projected to slip into increasing deficits due to the effects of the structural ageing of the Australian population.

Some have argued that the establishment of the fund will result in the government limiting the volume of services and/or tax cuts by running a budget surplus to be deposited in the fund. They believe that liabilities should be paid from revenues as they arise. However, it is unfair to saddle a future generation of taxpayers with liabilities incurred by a previous generation. If these liabilities are not met in a period of budget surpluses general levels of taxation may have to rise to meet those liabilities.

Also, not all future budget surpluses will be needed to be diverted into the Future Fund for the target balance to be met. As mentioned before, $18 billion that is currently on deposit with the Reserve Bank will be the seed capital. The combination of this amount, expected surpluses from the 2005-06 and the 2006-07 budgets, plus the expected proceeds of sales from Commonwealth assets, suggest that the Future Fund could be $62 billion by June 2007. An average yield of 6.5 per cent per year for the next 13 years will see the fund reach its target of $140 billion by June 2020, without further contributions from budget surpluses.

The report from the Productivity Commission entitled Economic implications of an ageing Australia projects a substantial increase in real income by 2040. Some feel that the projected increases in costs and the shortfalls in government revenue can be met from increased taxes at that time. It is thought that such taxes will have less adverse effect on that future generation due to the increase in real incomes and living standards. However, it is not that simple, as raising taxes can have other consequences. There are only three economic flows that can be taxed: labour income, capital income and consumption.

As pointed out by the current Treasury secretary, Dr Ken Henry: ‘Higher rates of tax on consumption’—that is, a higher GST rate—‘are not politically sustainable. Higher rates of tax on capital income would dry up flows of international capital, which are likely to be vital in the future, and higher tax rates on labour income simply accelerate the withdrawal of labour into early retirement, thereby decreasing a source of revenue.’

There are also concerns about the impact of the fund on financial asset prices due to the likely size of the fund. An initial transfer of $18 billion and a projected size of $140 billion in 2020 is certainly large. However, it needs to be assessed against the current and expected size of the superannuation industry to determine any potential impact on Australian investment markets.

If all of the initial $18 billion were invested at once the fund would only have been around 2.3 per cent of the total size of the superannuation industry at the end of the December quarter 2005. If half of this initial asset were invested in shares it would represent only one per cent of the total market capitalisation.

By 2020, the total value of superannuation assets in Australia has been estimated to be between $1,700 billion and $2,280 billion. Based on these figures, the fund in 2020 will be around 5.7 per cent to 7.6 per cent of the estimated total superannuation funds invested. Large as the fund may be, it may not be large enough to significantly affect asset prices in the way some have feared, and if an effect did occur it is likely that the investment managers of the fund would seek alternative investment opportunities.

Several commentators and the Australian Labor Party have called for the fund to concentrate on directly investing in infrastructure assets, as we have recently heard. The assumption behind this is that there is a shortage of funds available for investment in infrastructure within Australia.

However, Mr Dennis O’Neill, CEO of the Australian Council for Infrastructure Development, has noted that currently there is no shortage of money for infrastructure developments. Also, the fund is investing part of the government’s fiscal surplus—that is, money that is left after outlays on recurrent expenses and new capital works. Investment in infrastructure should be considered as part of outlays by the government, not part of its surpluses. The fund should not be hindered by imposing a requirement that part of the fund be reserved for investment in public infrastructure.

Some have a concern about taxpayers having to meet public servants’ superannuation liabilities. This concern is irrelevant as this will be the position whether or not the fund is created. The government acknowledges its legal obligation to meet these liabilities, irrespective of the existence of the Future Fund. Also, although budget surpluses may be put into the fund, its total assets will be made up of investment earnings and proceeds from asset sales. Contributions from these sources are likely to dwarf contributions from tax revenues.

Others have mentioned the establishment of other types of funds instead: the Building Australia Fund and the establishment of 20 million small funds for every Australian. Once again, this is irrelevant, as there is still a liability of $90 billion which is expected to increase to $140 billion by 2020. This liability needs to be addressed. This bill addresses this liability and allows future generations to deal with the massive changes that the ageing population will bring.

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