Future Fund

The Future Fund was established in 2006 as a financial asset fund designed to accumulate financial assets and invest them on behalf of the Australian Government to address the government’s unfunded superannuation liability. This liability arises from the superannuation entitlements payable to the majority of current and retired Commonwealth public servants and defence personnel.

How is it funded?

The Future Fund comprises a combination of budget surpluses and proceeds from the sale of the Government’s stake in Telstra in late 2006.

How is it managed?

The fund is overseen by a Board of Guardians, not directors as would be the case in a commercial entity.

How much money is in the fund?

As at August 2007, the fund’s balance was around $60 billion. This includes the value of approximately 2.1 billion shares in Telstra Corporation, which are held under escrow until November 2008, subject to certain exceptions. The Howard Government expected that this level of assets, plus the expected investment earnings of the fund, would be sufficient to allow it to meet its objectives without further contributions.

Why does it exist?

Currently, the unfunded component of the Australian Government’s superannuation benefit payments is paid by the government on a ‘pay as you go’ basis. This means the government pays out approximately $4.5 billion a year in gross superannuation benefit payments. If this were to continue, this figure would grow over the years at a time when the Budget will be facing pressure from an ageing population.

Further, contributions to the Future Fund (and other government funds such as the Higher Education Endowment Fund) withdraw resources from the economy at a time when it is running close to its full capacity, thereby limiting increases in inflation flowing from government spending.

What does it invest in?

The Future Fund’s investment policies are:

• to invest only in financial assets, including overseas financial assets (although Howard Government Treasurer Peter Costello said that Australian investments would probably comprise the bulk of the fund’s investment holdings)
• not to directly invest in property, infrastructure or other projects (although it will be able to invest in pooled funds that invest in these asset classes)
• not to take control of listed companies or unlisted companies that have more than 50 members
• to exercise its voting rights in relation to companies in which it holds shares, and
• not to borrow, except for short-term borrowing associated with the settlement of transactions or any circumstances listed in regulations.

The responsible ministers (the Treasurer and the Minister for Finance and Administration) have issued an investment mandate to the board to provide strategic guidance on its expectations for the investments of the fund. The board is to adopt as a benchmark an average return on the fund of at least the Consumer Price Index plus about 5 per cent per annum over the long term.

What has it invested in?

The initial cash contributions to the fund, a little over $40 billion in total, have been invested with the Reserve Bank of Australia, earning a risk-free rate of return. Over time, and in line with the Future Fund board’s long-term investment strategies, these assets will be invested into a broad range of asset classes. As noted above, the Future Fund also holds 2.1 billion shares in Telstra, which are held under escrow and cannot be traded (except in limited circumstances detailed by a Direction from the Minister for Finance and Administration) until November 2008.

When can it be drawn upon?

The Future Fund cannot be drawn upon for the purposes of meeting the Commonwealth’s unfunded superannuation liability before either:

• 1 July 2020 (whether or not it contains enough assets to meet the unfunded liability at that date), or
• an earlier date, but only if the Future Fund contains enough assets to meet the Commonwealth’s unfunded superannuation liability at that date.

Library documents
Richard Webb and Leslie Nielson, ‘The Future Fund’, Research Note, no. 43, Parliamentary Library, Canberra, 2004–05.