page considers the Future Fund, the Australian national
SWF, and the Higher Education Endowment Fund.
It covers -
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
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
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
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
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
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
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
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
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.
The Fund has been criticised as less transparent than
its Norwegian counterpart. It publishes an annual report
and a Statement of Investment Policies (PDF).
There are no discrete 'ethical investment' constraints.
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
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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