Andrew Murray (WA, Australian Democrats) Share this | Hansard source

The Future Fund Bill 2005 proposes establishing a financial asset fund to meet the Commonwealth’s current and projected future unfunded public sector superannuation obligations. This bill has the potential for a substantial long-term impact on the way the government manages its budget surpluses and asset sales proceeds. It might also have a significant accompanying impact on the way capital markets operate.

The purpose of this bill is to establish a financial asset fund to meet the Commonwealth’s current and projected future unfunded public sector superannuation obligations. That current liability stands at about $90 billion and is projected to grow to about $140 billion by 2020. This bill proposes the establishment of the Future Fund, the Future Fund Board of Guardians and the Future Fund Management Agency. Critical issues to consider include the quantum of funds that are projected to be under management, transparency, board accountability and adequate and accurate reporting. These are all critical factors. A number of issues arise right up front that relate to the exercise of shareholder ownership voting rights. How will the Future Fund Board of Guardians exercise the voting rights of the financial assets under their control? Will there be a flow-through of proxies from fund managers to the Future Fund? Who will determine the voting pattern of the board on key investment matters, and against what criteria? And will it be politically influenced in any way in the future?

Ethical, socially responsible and so-called green investment policies are not discussed in the bill. Whilst there is merit in reserving investment decisions for the board, consideration should be given to limiting the investment in certain classes of financial assets such as tobacco. After all, this is a public sector body being set up in the national interest and it should be paying attention to issues such as those. Considering the importance of the decisions required in passing this bill, I note that the Senate wisely referred the bill to the Senate Economics Legislation Committee, which duly reported its findings yesterday following a somewhat rushed inquiry.

Whilst it is the decision of the committee that the bill be passed, with some suggested areas of concern noted for government consideration, I still have a number of concerns about the Future Fund that I wish to raise in the Senate today. Some of the concerns pertain to the merit of the Future Fund as a concept and, assuming the concept is realised, how it can be implemented to ensure that principles such as accountability, independence, transparency and propriety are upheld. There are indeed questions as to why the existing mechanisms for dealing with public sector superannuation funds have not been retained and why it is not possible to improve or increase the funding in those funds in a manner similar to those taken up by the states and territories. I refer you to appendix 3 of the report, where there is a useful table showing how the states and territories have addressed that matter, and none have adopted a legislative framework as is proposed here.

With regard to the merit of the Future Fund, one cannot ignore the scale of unfunded public sector superannuation. The Commonwealth’s unfunded public sector superannuation liability currently stands at approximately $90 billion, growing to approximately $140 billion by 2020—big bickies in anybody’s language. The government asserts that this is the single largest determinable forward liability and, as such, the purpose of the Future Fund is to make provision for more effective management of the Commonwealth’s balance sheet. The Future Fund is indeed one means of managing this liability, but it is not the only means.

The current method of funding the annual portion of the liability out of current revenue could certainly continue. The government’s argument against this alternative is that the liability will impinge upon the financial strength of future generations, yet there are two arguments that dispute this opinion. Firstly, the 2002 Intergenerational reportan excellent initiative by the Treasurer—asserts that unfunded government superannuation will fall, in fact halve, from 0.6 per cent of GDP in 2001-02 to 0.3 per cent in 2041-42, through the natural process of attrition in member numbers. A similar argument was presented to the committee by the expert witness Mr Kennedy and by the ACCI. Mr Kennedy stated that superannuation liabilities would level out in the future due to the falling number of members drawing down on unfunded superannuation commitments and that this liability is relatively insignificant compared with other unfunded and growing forward liabilities such as social welfare, including age pensions. However, it is asserted that future social welfare cannot be reliably measured and, as such, is not recognised as a liability for balance sheet purposes. From a commonsense perspective, as opposed to a technical perspective, that is a poor argument as it is certainly possible to credibly estimate future welfare obligations.

Regarding the accounting principle of a defined liability, from a balance sheet accounting perspective the recognition principle means that a liability is recognised—and, as the government asserts, is determinable—only once it can be reliably measured and is a probable future expense. Problems with measurement and timing do not mean that such unfunded obligations are not going to occur—there is simply greater uncertainty about questions of how much and when. Thus it is wise to not stick one’s head in the sand but, rather, acknowledge that, yes, there is consensus that social welfare, including age pension obligations, rather than unfunded public sector superannuation is the single greatest financial obligation facing future Australian generations; and, yes, while there is uncertainty about the quantum and timing of such obligations, they will still be very large.

More importantly, diverting public money to the Future Fund to ease the financial pressure of future generations is erroneous in the sense that there is a need to recognise the opportunity cost of an investment in the Future Fund because there will be less investment available in areas such as health, the environment, infrastructure, tax reform and social welfare. Those areas of reform would also benefit future generations and ease their financial burden. Indeed, such investments have the added benefit of boosting productivity and stimulating the economy, unlike the priority of a Future Fund which is to merely meet a future expense. Of course, I recognise that there is an indirect intention, because if you invest in the Future Fund you invest in the capital markets, and capital markets invest in productive activities. So you cannot completely discount the beneficial effects of that investment. Prioritising unfunded public sector superannuation, a defined liability with an extant method of funding, is equivalent to avoiding other undefined but equally pressing reform options—options with far better future economic and social outcomes.

The ACCI is correct in asserting that there is an opportunity cost associated with placing the money in the Future Fund when there are alternative present uses for it. The government responds with the view that the Future Fund is an ‘ex-post’ fund—that is, a fund which receives contributions only after all other investment decisions have been made. In other words, it is a genuine surplus after you have completed your budgetary intentions. But this is a notional assurance. It offers no protection for alternative investments or budget decisions of either a current or capital nature, since such alternatives can be easily avoided through policy setting and prioritising. Otherwise stated, an ‘ex-post’ fund can receive the entire surplus if no other investment decisions are made or if such decisions are not a priority for the government of the day. Indeed, the long-term perspective raises other worrying concerns, as suggested by Mr Kennedy at the inquiry into this bill. He stated:

In being created as such a long-term strategy, the Future Fund would inevitably find itself under the stewardship of different future governments and parliaments with, perhaps, a vastly different make-up to what we have come to expect, and for whom the policy agenda, and associated political and fiscal priorities, may profoundly differ from the present.

The inquiry did agree that it is not possible to completely insulate the Future Fund and that future governments will be able to change the law regardless of what are seen to be the prudential underpinnings of the bill. Thus, this is an obvious risk that arises from this form of financial planning undertaken by the government. It is important to recognise that it is a greater risk than the existing manner in which superannuation is managed.

If, as is obviously likely, the Future Fund becomes a reality—because the government has the numbers and, anyway, there is support from the opposition for this concept—the relevant question to ask is: what steps should be implemented to ensure the highest fiduciary standards apply to the management and stewardship of the fund? Considering the quantum of funds that are projected to be under management, from the Democrats’ perspective, corporate governance, transparency, independence, board accountability and adequate and accurate reporting are critical factors that must be instituted if the fund is to be successful. Furthermore, they must be monitored and they must be responded to if they are inadequate.

Key priorities in this area include a well-defined code of conduct for the board of guardians, including transparent processes, appointments on merit and well-defined conflict of interest safeguards. On the investment mandate side of things, there must be an ethical investment policy, a high level of independent professional analysis and the diligent exercise of voting on important matters.

I was pleased to note the suggestion from Mr Sandy Easterbrook of Corporate Governance International that the Future Fund provides a major opportunity to be a market leader in terms of best practice voting policy and engagement with companies in which a shareholding is held. The government should not resile from that obligation to be a leader in modern, accountable, ethical and advanced market participation by investment funds. As I have already stated, these are crucial areas from the Democrats’ perspective. Mr Easterbrook stated:

It is now accepted that best practice is that funds should vote their shares in all cases and should make sure that their voting is well considered.

I concur with the ideal of voting occurring in all cases, and I would encourage the government to adopt this practice as a matter of principle for the Future Fund. However, I recognise that investment managers are not always equipped to vote on all matters and they need to develop the abilities to do so. So my amendment, which will be put out later, only mandates voting in three key areas.

As I said earlier, there are questions relating to voting that need to be answered. They need to be determined in the founding principles and obligations that are applied to the board of guardians, and not later on. The government must put down its expectations. It must say how the Future Fund Board of Guardians will exercise, in general, the voting rights of the financial assets under their control. They must not have a hands-off approach to voting, in my view. It must indicate that there should be a flow-through of proxies and that proxies should be exercised. It should ask the board to be specific as to how they determine their votes. And, of course, the government must put in as many protections as it can to prevent or limit future political interference in the way in which the funds are employed.

The OECD principles of corporate governance, which were put out in January 2004, say the following concerning disclosure of voting:

The exercise of ownership rights by all shareholders, including institutional investors, should be facilitated.

Institutional investors acting in a fiduciary capacity should disclose their overall corporate governance and voting policies with respect to their investments, including the procedures that they have in place for deciding on the use of their voting rights.

That is a very strong injunction for these sorts of funds not only to be participants in the market process but to be very clear, transparent and public about what their policy is. The OECD principles also state:

The voting record of such investors should also be disclosed to the market on an annual basis.

The Democrats believe that the trustees and managers of superannuation funds and managed investment schemes have a fiduciary duty to act in the best interests of their members and beneficiaries. We believe that a trustee can only satisfy their fiduciary obligations by taking an active interest in material corporate governance activities of their equity investments. That active interest requires them to develop an informed and professional understanding of these matters. Material corporate governance activities would include voting on three key matters, and in our view these are the three that matter most: on any constitutional issue—in other words, any change to the constitution of a company; on any decision affecting the election of directors; and on the remuneration packages of directors.

We note that Mr Easterbrook of Corporate Governance International goes further, but we believe that at least voting on these three matters should be mandatory. The Democrats will attempt to amend the legislation to extend the requirement to vote on material corporate governance resolutions to the Future Fund managers. Responses from Treasury and the Department of Finance and Administration about the exercise of voting rights for the Future Fund were decidedly and deliberately vague. Clause 24 of the bill was referred to as a suitable guiding principle ‘in a broad sense’. It is not. It is an invitation to a laissez-faire approach, it is an invitation to a hands-off approach, and in my view it is a derogation of responsibility. To put it frankly, the government need to set founding principles which clearly establish issues of public and national interest leadership in ethical corporate and investment governance. They clearly need to spell out—and they have the ability to do so—what they expect from that board.

Corporate governance and investment principles are not about broad and vague policies. They are about specificity, what can be done and what cannot be done—and in making those remarks I refer you to books such as the Blue Book: Corporate governance—A guide for fund managers and corporations, issued by the Investment and Financial Services Association Ltd, which are clear attempts to be specific about these matters. A broad, vague reference to what may or may not apply, conditional upon this or that, merely has the opposite effect of reducing transparency, crippling corporate governance structures and reducing responsible market behaviour.

Appointments on merit are another longstanding Democrat initiative that we continue to pursue and which have direct applicability to the Future Fund Board of Guardians. Wherever appointments are made to institutions set up by legislation, independent statutory authorities or quasi-government agencies, the processes by which these appointments are made should be transparent, accountable, open and honest. It is still the case that appointments to statutory authorities are left largely to the discretion of ministers with the relevant portfolio responsibility. There is no umbrella legislation that sets out a standard procedure regulating the procedures for the making of appointments. Perhaps most importantly, there is no external scrutiny by an independent body of the procedure and merits of appointments. An independent body should be given the responsibility of scrutinising government appointments against a set of established criteria.

This system works well in the United Kingdom since the 1995 Nolan commission. Lord Nolan managed to persuade the UK government to accept that appointments should be based on merit. Lord Nolan set out key principles to guide and inform the making of such appointments. These include: a minister should not be involved in an appointment where he or she has a financial or personal interest; ministers must act within the law, including the safeguards against discrimination on grounds of gender or race; all public appointments should be governed by the overriding principle of appointment on merit, except in limited circumstances; political affiliation should not be a criterion for appointment; selections on merit should take account of the need to appoint boards that include a balance of skills and backgrounds; the basis on which members are appointed and how they are expected to fulfil their roles should be explicit; and the range of skills and backgrounds that are sought should be clearly specified.

In response to the Nolan committee’s recommendations, the United Kingdom government subsequently created the Office of the Commissioner for Public Appointments, which has a similar level of independence from the government as the Australian Auditor-General, to provide an effective avenue of external scrutiny. The Democrats have used the Nolan committee’s recommendations in our persistent campaign for appointments on merit amendments in various items of legislation because they are tried and tested. Meritorious appointments are the essence of accountability. We will move appointment on merit amendments to this bill, even though we know that this government will reject, probably for the 30th time, the idea of appointments on merit.