Referral
1.1
On 25 August 2021, the Investment Funds Legislation Amendment Bill 2021 (bill) was introduced to the House of Representatives by the Honourable Stuart Robert MP.
1.2
On 2 September 2021, pursuant to the 11th report of 2021 of the Senate Standing Committee for the Selection of Bills, the bill was referred to the Senate Finance and Public Administration Legislation Committee (the committee) for inquiry and report by 14 October 2021.
Conduct of the inquiry
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The committee agreed to open submissions on 2 September 2021 and set 20 September 2021 as the closing date. The committee wrote to a range of key stakeholder groups, organisations and individuals drawing their attention to the inquiry and inviting them to make a written submission.
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The committee received 13 submissions, which are available on the committee’s webpage and listed at Appendix 1.
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The committee held a public hearing in Canberra and via videoconference on 28 September 2021. The witness list for the hearing can be found at Appendix 2.
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Details of the inquiry, including links to the bill and associated documents, were published on the committee’s website.
Report structure
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This chapter provides an overview of the Future Fund and the key amendments proposed by the bill. The second chapter goes into details about the bill’s provision, contained within four schedules.
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The third and concluding chapter outlines the key issue put forward in evidence and presents the committee’s views and recommendation.
Acknowledgement
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The committee thanks all those who contributed to the inquiry by making submissions and speaking before the committee at a public hearing.
Purpose of the bill
1.10
The bill seeks to streamline the operation of the Australian Government’s investment funds by:
enacting a new employment framework for staff of the Future Fund Management Agency (the Agency);
providing a partial exemption from the Freedom of Information Act 1982 (FOI Act) for certain investment documents;
amending the disbursements framework for the Medical Research Future Fund (MRFF), and
making a number of administrative amendments to streamline the operation of the Medical Research Future Fund Act 2015 (MRFF Act) and the Emergency Response Fund Act 2019 (ERF Act).
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To achieve these purposes, the bill seeks to amend the Future Fund Act 2006 (Future Fund Act) to enact a new employment framework for staff of the Agency. The new employment framework would reinforce the independence of the Future Fund Board of Guardians (the Future Fund Board) from the Australian Government and better align the framework to the financial services industry.
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The bill amends the FOI Act to provide a partial exemption for documents handled by the Future Fund Board and the Agency in respect of the Board’s investment activities.
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The bill also makes further amendments to the MRFF Act, to streamline the administration of the Medical Research Future Fund, including making state and territory governments eligible to receive funding directly from the Medical Research Future Fund Special Account.
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The bill amends the ERF Act to transfer the administrative responsibility for the expenditure of the Emergency Response Fund from the Department of Home Affairs, to the National Recovery and Resilience Agency (NRRA).
Background to the bill
The Future Fund
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The Future Fund was established on 3 April 2006 by the Future Fund Act. The Future Fund is a financial asset fund, set up to strengthen the Commonwealth’s long-term financial position by making provision for unfunded superannuation liabilities that will become payable during a period when an ageing population is likely to place significant pressure on the Commonwealth’s finances.
1.16
As Australia’s sovereign wealth fund, the role of the Future Fund is to generate high, risk adjusted returns over the long-term. The Future Fund operates independently from Government and tailors the management of each fund to its unique investment mandate.
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Under the Future Fund Board, and with the support of the Agency, the Future Fund invests in the assets of six special purpose public asset funds. As at 30 June 2021, the total funds managed across the six funds listed below, stands at $245.8 billion:
the Medical Research Future Fund
the Aboriginal and Torres Strait Islander Land and Sea Future Fund
the Emergency Response Fund
the DisabilityCare Australia Fund.
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This bill makes key amendments to only two of the six special purpose public asset funds, the Medical Research Future Fund and the Emergency Response Fund, which are discussed in more detail below.
The Medical Research Future Fund
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The Medical Research Future Fund (MRFF) was established on 26 August 2015 by the Medical Research Future Fund Act 2015 (MRFF Act). It provides an ongoing funding stream for medical research and medical innovation into the future with the credits to the MRFF preserved in perpetuity. The capital of the MRFF is invested, with the earnings used to make grants of financial assistance for medical research and medical innovation over the long term.
The Emergency Response Fund
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The Emergency Response Fund (ERF) was established on the commencement of the Emergency Response Fund Act 2019 (ERF Act), on 12 December 2019. On establishment, the ERF was credited with the uncommitted balance of the Education Investment Fund, which has now been closed.
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The ERF allows the Government to draw up to $200 million in any given year, beyond what is already available to fund emergency response and natural disaster recovery and preparedness, where it determines the existing recovery and resilience-building programs are insufficient to provide an appropriate response to natural disasters.
The Future Fund Act
1.22
According to section 3 of the Future Fund Act, the main objective of the Fund is to strengthen the Commonwealth’s long term financial position. The Future Fund is intended to make provision for unfunded superannuation liabilities that will become payable during a period when an ageing population is likely to place significant pressure on the Commonwealth finances.
1.23
The Future Fund Act is administered by the Department of Finance and designates the Minister for Finance and the Treasurer as the ‘responsible Ministers’. Currently, the responsible Ministers have the joint power to:
credit cash amounts to the Future Fund through a Special Account and to transfer financial assets to the Fund;
appoint and remove members from the Fund Board; and
issue the Future Fund Investment Mandate.
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The Future Fund Act gives effect to the following matters concerning the fund.
Establishment of Government bodies
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The Future Fund Act contains provisions for the establishment of the Future Fund Board and the Agency:
The Future Fund Board is a body corporate, accountable to the Government for the safekeeping and performance of the Australian Government investment funds.
The Agency is a non-corporate Government entity subject to the Public Governance, Performance and Accountability Act 2014 (PGPA Act), and supports the Future Fund Board by performing operational activities associated with fund’s investments.
Investment Mandate
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The responsible Ministers are required to issue an Investment Mandate. Investment mandates set out the Government’s broad expectations of how the Future Fund invests the assets of each fund. They set the benchmark rate of return for each fund and the timeframe in which it should be achieved.
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The responsible Ministers issued the Future Fund Investment Mandate Direction 2017 to the Future Fund Board on 15 May 2017. It requires the Future Fund Board adopt a benchmark average return for the Future Fund of ‘at least the Consumer Price Index (CPI) +4.0 to +5.0 per cent per annum over the long term’. In striving for this benchmark return, the Future Fund Board may pursue an acceptable, but not excessive, level of risk. The investment mandate direction is a legislative instrument that is not subject to disallowance.
Crediting amounts to the Future Fund
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The responsible Ministers can make credits to the Future Fund, so long as the additional amounts do not result in the balance of the Fund exceeding the Target Asset Level. Relevantly, the Target Asset Level is the best estimate of the Future Fund balance that would be required to offset the present value of projected unfunded superannuation liabilities, accrued up to the same point in time.
Debiting amounts from the Future Fund
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The responsible Ministers can debit (drawdown) from the Future Fund in accordance with the purposes of the Future Fund Act:
to discharge unfunded Commonwealth superannuation liabilities once the balance of the Future Fund is greater than or equal to the Target Asset Level, or from 1 July 2020, whichever is earlier; or,
meet expenses associated with the investment function and administration of the Future Fund.
The Future Fund Board of Guardians
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The Future Fund Board is a body corporate with responsibility for managing the investments of the Australian Government investment funds. The Future Fund Act gives investment powers to the Future Fund Board.
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The Future Fund Board makes its investment decisions (based on its Investment Policies) independent of the Government and holds the funds’ investments in its own name, however, the Commonwealth retains ownership of the funds at all times.
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The Future Fund Board consists of a Chair and six other members, who are appointed by the responsible Ministers on a part-time basis for a maximum term of five years with the possibility of reappointment.
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Section 38 of the Future Fund Act specifies that Future Fund Board members are to have substantial experience or expertise; and professional credibility and significant standing; in at least one of the following fields:
investing in financial assets;
the management of investments in financial assets; or
Future Fund Management Agency
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The Future Fund Board is supported by the Agency, which is a non-corporate Government entity subject to the PGPA Act, within the Finance Portfolio.
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The Chair of the Future Fund Board is also the Chief Executive of the Agency. In practice, however, the operations of the Agency are overseen by a separate Chief Executive Officer.
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While the Future Fund Board defines the investment strategy for the funds under its responsibility, the Agency is responsible for the operational activities associated with the funds’ investments. The Future Fund Board decides how the funds are to be invested, while the Agency, through external investment managers, ensures that the funds are allocated consistent with those decisions. The Agency also has various ancillary responsibilities such as the provision of administrative services to the Future Fund Board. For financial reporting purposes, the Future Fund Board and Agency are treated as if they are a single entity.
Financial impact statement
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As discussed further in Chapter 2, the Explanatory Memorandum (EM) states that the changes to the disbursement framework for the MRFF will specify a fixed maximum annual disbursement of $650 million from 2022-23.
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The EM states that the changes to the Future Fund Act, the FOI Act and the ERF Act, and the administrative changes to the MRFF, are not expected to have any financial impact.
Statement of compatibility with human rights
1.39
The statement of compatibility of human rights accompanies the bill. It notes that the bill engages with the right of everyone to the enjoyment of the highest attainable standard of physical and mental health, enshrined in Article 12 of the International Covenant on Economic, Social and Cultural Rights.
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The statement of compatibility of human rights asserts the bill is compatible with human rights and freedoms. The bill will allow for higher investment earnings over the long term, which will be used to fund important medical research and innovation projects, to benefit the health and wellbeing of all Australians.
Consideration by other committees
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The Senate Standing Committee for the Scrutiny of Bills (Scrutiny Committee) commented on the bill in its Scrutiny Digest 14 of 2021.
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The Scrutiny of Bills committee requested advice from the (minister/treasurer) in relation to:
provisions in the bill permitting the Future Fund Chair to make instruments that are not subject to parliamentary disallowance; and
provisions in the bill allowing the MRRF special account to makes grants to states and territories.