Australia

This page considers the Future Fund, the Australian national SWF, and the Higher Education Endowment Fund.

It covers -

• introduction
• background
• structure
• transparency
• the HEEF

     introduction

The Australian Future Fund (FF) derives its capital from privatisation of national government assets and cash contributions, ultimately from tax revenue. It has a statutory basis, operating at an arm's length from government and expected to fund public sector superannuation payments.

A separate Higher Education Endowment Fund (HEEF) provides revenue for education sector capital works and research facilities.

     background

The national government, addressing criticism regarding privatisation of Telstra, announced during the 2004 federal election that it would establish a Future Fund to "meet unfunded Commonwealth superannuation liabilities, contribute to national savings and increase net worth". Unfunded public sector superannuation liabilities (ie pension payments to national government officials) are the government's largest liability, amounting to over $91 billion in 2006 and expected to grow to around $140 billion by 2020.

In 2007 the government foreshadowed establishment of a Higher Education Endowment Fund (HEEF), with investment of $7 billion capital being undertaken by the Future Fund.

The Future Fund Act, establishing the Future Fund (with an independent statutory board and a new statutory agency to support management of the Fund), commenced on 3 April 2006.

The Fund aims to accumulate financial assets to offset the Government's unfunded superannuation liabilities by 2020. Initial assets involved contribution of $18 billion cash by the government (primarily from existing deposits held at the Reserve Bank, Australia's central bank), supplemented by $22.2 billion proceeds from the Telstra T3 share sale and transfer to the Fund of the government's residual holdings in Testra (market value $8.9 billion). Apart from those Telstra shares, as at 30 June 2007 the Fund had an exposure to Australian equities of $1.85 billion and to international equities of $2 billion; remaining assets in the form of cash were invested with the Reserve Bank pending development of a broader investment strategy.

The Future Fund is exempt from all forms of taxation except for Fringe Benefits Tax (FBT) and the Goods & Services Tax (GST).

     structure

The expectation is that the Future Fund Board of Guardians will reinvest all of the Fund's earnings, with capital accumulating until the level of assets is sufficient to offset the liability.

The Future Fund is quarantined from the rest of the Budget through the Future Fund Act 2006. Decisions by the Board will be in accord with a broad investment mandate (PDF) issued by the Treasurer and the Minister for Finance & Administration. Board members will be selected by the Government for their expertise in investment and corporate governance and the Board will set the investment strategy and the strategic asset allocation for the Fund.

The Future Fund Management Agency, a body in the Finance & Administration portfolio, provides executive support and investment advice to the Board. Investment management will be contracted out to private sector funds managers. The cost of that contracting and remuneration of Board members will be met from the Fund.

The Agency is a 'prescribed' agency under the Financial Management & Accountability Act 1997 (FMA Act), legislation providing a framework for "the appropriate management of public money, public property and other Australian Government resources". It is subject to the national Freedom of Information Act (FOI Act) and other legislation covering national government agencies.

The Board is required to seek a long-term benchmark for real returns of between 4.5% and 5.5%, similar to the target for the Norwegian SWF. There is an acceptance that market conditions may prevent that level of return in all years.

The Fund can not take a controlling stake in companies (as defined by reference to the takeover provisions of the Corporations Act - 2). It is not permitted to borrow money, except for short-term settlement of transactions, and is prohibited from using derivatives for "leverage or speculation".

It is restricted to investing in financial assets, ie cannot make direct investments in infrastructure projects or property. However, it can take stakes pooled investment vehicles as a way of investing in infrastructure and property.

The expectation is that its 'investment universe' will encompass -

a) global equities - large/mid capitalisation, small capitalisation and emerging markets securities of companies on any recognised stock exchange
b) Australian equities - securities of companies listed on the Australian Stock Exchange. (Voting shares in Telstra, other than shares transferred into the Fund in February 2007, are not permitted.)
c) global fixed interest including sovereign debt (debt instruments denominated in foreign currencies that are issued or guaranteed by foreign governments) and non-sovereign debt (debt instruments denominated in foreign currencies that are issued or guaranteed by non-government agencies that have debt ratings, as rated by a recognised international rating agency).
d) Australian fixed interest comprising sovereign debt (debt instruments issued or guaranteed by an Australian national or a state government) or corporate debt (debt instruments in Australian dollars issued or guaranteed by non-government agencies that have satisfactory debt ratings).
e) property comprising Australian and international unlisted assets and listed property securities (land and buildings held in conjunction with other investors in pooled vehicles, whether listed on an approved stock exchange or owned privately).
f) private market assets that have less liquidity than, and/or are lowly correlated with, listed securities, including Australian and international private equity, infrastructure, timber and other commodities.
g) commodities futures comprising a broad basket of futures prices for frequently traded commodities such as metals, crude oil or grain, that trade on an exchange.
Exposure is usually achieved through futures contracts or other derivative instruments.

     transparency

The Fund has been criticised as less transparent than its Norwegian counterpart. It publishes an annual report (PDF) and a Statement of Investment Policies (PDF). There are no discrete 'ethical investment' constraints.

     the HEEF

In 2007, as Australia headed towards a national election, the government announced "an unprecedented investment for the future of universities" by establishing a perpetual Higher Education Endowment Fund (HEEF).

That Fund has an initial investment of $6 billion from the 2006-07 Budget surplus, with hope of further contributions to the Fund from future surpluses. It has a statutory basis under the Higher Education Endowment Fund Act 2007. The Board of Guardians of the Future Fund will be responsible for investing the capital. The expectation is that income from the Fund will be used to support university capital works and research facilities. Distribution (with "dividend" of around $300 million per year) was to be by the Minister for Education, Science & Training, reflecting the advice of an independent HEEF Board.

Critics commented that the Fund was a 'smoke & mirrors' exercise, with income from HEEF replacing rather than supplementing grants by the Minister.

In May 2008 the new Government announced establishment of a Education Investment Fund (EIF), which would replace the HEEF. The EIF would add $5 billion from each of the 2007/08 and 2008/09 budget surpluses to $6.2 billion of assets held by the HEEF.
It will be oriented toward providing capital investment in higher education and vocational training, but may also be directed toward infrastructure in schools.

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