The origin, management and experience of Australia’s Future Fund

QI Chuanjun1

(1.National Institute of Social Development of Chinese Academy of Social Sciences )

【Abstract】The Future Fund Australia established in 2006 can be regarded as either a direct measure to tackle unfunded superannuation liability of the public sector or a prudent choice to cope with population ageing. However, compared with other OECD countries, Australia’s need for such a sovereign pension fund is greatly reduced. In fact, it is an important measure to strengthen the medium-term financial position. On the one hand, the fiscal surplus created by the medium-term fiscal strategy provides the original capital for it; on the other hand, the medium-term fiscal strategy restricts the fiscal surplus to be used for tax reduction or social project expenditure increases. By strengthening its independence, the Future Fund has improved its governance, transparency and accountability. Finally, it has not only eliminated the various doubts at home and abroad, but improved its long-term returns.

【Keywords】 pension fund; population ageing; fiscal strategy; sovereign wealth funds;

【DOI】

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    Footnote

    [1]. [1] In August 2015, the State Council of the People’s Republic of China published the Measures for the Administration of Investment in Basic Pension Insurance Funds, which marked the market-oriented operation of basic pension insurance funds (one of its sovereign pension funds); In November 2017, the State Council published the Implementation Plan for Transferring Part of State-Owned Capital to Fortify Social Security Funds to further enlarge the National Social Security Fund (another sovereign pension fund). All of these have showed that the scale of Chinese sovereign pension funds is continuously expanding. [^Back]

    [2]. [2] ANZ Investment Bank, “Australia’ Future Fund,” June 27, 2007, http://www.anz.com/documents/fxonline/070627_FutureFund.pdf [2019-03-30]. [^Back]

    [3]. [3] Future Fund, “Future Fund Annual Report 2006-07,” September 18, 2007, https://www.futurefund.gov.au/about-us/annual-reports [2019-03-30]. [^Back]

    [4]. [4] Sovereign pension funds are not born today, and actually it emerges far earlier than sovereign wealth funds. Please refer to Zheng, B. China Securities Journal (中国证券报), (2008-1-14). [^Back]

    [5]. [1] Categorizing by the purpose of establishment, sovereign wealth funds are classified into the following types: first, a sovereign wealth fund that does not have a clear objective but to simply improve the investment return of savings, such as the “Abu Dhabi Investment Authority” of the United Arab Emirates; second, a pension reserve fund, such as the “National Pensions Reserve Fund” of Ireland; third, a financial stabilization or reserve fund, for example, the “Stabilization Fund of the Russian Federation”; fourth, a fund used for education, poverty alleviation, infrastructure and other particular purposes, such as the “Poverty Action Fund” of Uganda. [^Back]

    [6]. [2] Future Fund, “Future Fund Annual Report 2017-18,” September 25, 2018, https://www.futurefund.gov.au/about-us/annual-reports [2019-03-30]. [^Back]

    [7]. [1] Commonwealth of Australia, “Intergenerational Report 2007,” Commonwealth of Australia, Canberra, April 1, 2007, http://www.treasury.gov.au/sites/default/files/2019-03/IGR_2007_final_report-1.pdf [2019-03-30]. [^Back]

    [8]. [1] Commonwealth of Australia, “Intergenerational Report 2007,” Commonwealth of Australia, Canberra, April 1, 2007, http://www.treasury.gov.au/sites/default/files/2019-03/IGR_2007_final_report-1.pdf [2019-03-30]. [^Back]

    [9]. [2] OECD, “OECD Factbook 2015–2016: Economic, Environmental and Social Statistics,” OECD Publishing, Paris, April 8, 2016, http://dx.doi.org/10.1787/factbook-2015-en [2019-03-30]. [^Back]

    [10]. [1] United Nations, “World Population Ageing 2013,” New York: Department of Economic and Social Affairs Population Division, 27 May, 2014, https://www.un-ilibrary.org/population-and-demography/world-population-ageing-2013_30d0966c-en [2019-03-03]. [^Back]

    [11]. [2] Commonwealth of Australia, “2002-03 Budget Paper No. 5, Intergenerational Report 2002-03,” Commonwealth of Australia, Canberra, 14 May 2002, http://www.treasury.gov.au/sites/default/files/2019-03/2002-IGR-report.pdf [2019-03-18]. [^Back]

    [12]. [3] Eccleston R., “The Political Economy of Australia’s Future Fund-The Political Dimension,” The Political Economy of Sovereign Wealth Funds, Palgrave Macmillan UK, 2010. [^Back]

    [13]. [1] Eccleston, Richard, “Future Fund: a Future beyond the GFC,” Journal of the Asia Pacific Economy, 17(2): 284–297, 2012. [^Back]

    [14]. [2] Net debt is the residue after deducting selected financial assets (cash and savings, prepayment, investment, loan and placement) from selected financial liabilities (savings held, account collected in advance, government securities, loan and other borrowings). Net debt is a common index used to measure the fiscal condition of a government, but it does not include pension or pension-related liabilities. High level of net debt requires paying off the debt with an even higher level of income flow. [^Back]

    [15]. [3] Commonwealth of Australia, “Final Budget Outcome 2006-07,” Commonwealth of Australia, Canberra, September 2007, https://www.budget.gov.au/2006-07/fbo/FBO_2006-07.pdf [2019-03-30]. [^Back]

    [16]. [1] Net worth is established on the basis of net debt, and it includes not only government securities, loans and borrowings, financial assets such as cash, savings and other investment products, but also non-financial assets excluding net debt and some particular financial assets, with the most typical example being the superannuation liabilities of the public sector. [^Back]

    [17]. [2] Commonwealth of Australia, “Final Budget Outcome 2006-07,” Canberra, September 2007, https://www.budget.gov.au/2006-07/fbo/FBO_2006-07.pdf [2019-03-30]. [^Back]

    [18]. [3] Eccleston Richard, “Future Fund: a Future beyond the GFC,” Journal of the Asia Pacific Economy, 17(2): 284–297, 2012. [^Back]

    [19]. [1] Future Fund, “Future Fund Annual Report 2017–18,” September 25, 2018, https://www.futurefund.gov.au/about-us/annual-reports [2019-03-30]. [^Back]

    [20]. [2] Tsani S., Ahmadov I. and Aslanli K., Governance, Transparency and Accountability in Sovereign Wealth Funds: Remarks on the Assessment, Rankings and Benchmarks to Date, Baku, Azerbaijan, Public FinanceMonitoring Center, March 2010, pp. 1–25. [^Back]

    [21]. [3] Future Fund, “Future Fund Annual Report 2008–09,” October 5, 2009, https://www.futurefund.gov.au/about-us/annual-reports [2019-03-30]. [^Back]

    [22]. [1] Australian Chamber of Commence and Industry, “The Future Fund Is Not the Best Use of Budget Surpluses,” 2005, http://www.acci.asn.au/text_files/issues_papers/Superannuation/June%2005%20-%20Future%20Fund.pdf [2019-03-18]. [^Back]

    [23]. [2] Zhou, Y. Journal of Financial Development Research (金融发展研究), (5): 3–11 (2016). [^Back]

    [24]. [1] The Board and the Agency are also responsible for the investment operation of other four public funds established successively since 2008. The four funds are the Building Australia Funds established in 2008, the Education Investment Fund established in 2013, the Disability-Care Australia Fund and the Medical Research Future Fund established in 2015. They are established for different purposes, and their investment style varies notably, hence are operated separately, which is different from the Future Fund established according to theFuture Fund Act 2006. [^Back]

    [25]. [2] TheInvestment Mandate regulates that the benchmark annualized rate of return for investment of the Fund is a mark-up of 4.5%–5.5% to the consumer price index, and the risks taken must be “acceptable but not excessive,” the assessment of government to the rate of return is not in a term of one year, but is extended to five years. Moreover, the Future Fund is not allowed to obtain a shareholding status in the invested companies, or to hold over 20% of shares of any foreign listed companies, nor is it allowed to cause abnormal changes in Australia’s financial market with its investment behaviors, or do any harm to the government reputation. Taking into effect on July 1, 2017, the revised benchmark of investment of the Future Fund is a mark-up of 4%–5% to the annual consumer price index, which is 0.5 percent lower than before, reflecting the prudent attitude of the Australian government to the return of future market investment. [^Back]

    [26]. [3] The Agency consists of the chief executive officer, the general counsel, the chief risk officer, the chief culture office, the chief operating officer, the chief financial officer and the chief investment officer. [^Back]

    [27]. [1] Of course, countries that strictly follow fiscal disciplines can still utilize these fiscal surpluses to establish other types of sovereign wealth funds, such as fiscal stabilization funds or domestic infrastructure development funds, and it is a different story. [^Back]

    [28]. [2] Eccleston, Richard, “Future Fund: a Future beyond the GFC,” Journal of the Asia Pacific Economy, 17(2): 284–297, 2012. [^Back]

    [29]. [3] Commonwealth of Australia, “Budget Strategy and Outlook Budget Paper No. 1 2018–19,” Canberra, May 8, 2018, https://www.budget.gov.au/2018-19/bp1/bp1.pdf [2019-03-30]. [^Back]

This Article

ISSN:1007-0974

CN: 11-3799/F

Vol , No. 03, Pages 31-45+4-5

May 2019

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Article Outline

Abstract

  • 1 The origin of Australia’s Future Fund
  • 2 Sound governance is key to the efficient operation of the Future Fund
  • 3 Conclusions and implications
  • Footnote