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HANSARD EXTRACT

Future Fund Bill 2005: Second Reading

7 February 2006

Mr HAYES (Werriwa) (6.55 p.m.)—The amendments to be moved by the opposition are sensible and have been developed with a view to the future of Australia beyond the current electoral cycle. Labor has stood firm in its belief about the proper use of the fund that will be established by the Future Fund Bill 2005. Labor believes that it is necessary to use some of the considerable funds that will be controlled under the Future Fund for more than just fulfilling the minister’s investment objectives or acting as a halfway house to privatisation.

The bill before us signals another step in a return to big government under coalition control. This government is not content with being the largest taxing government in Australia’s history, nor is it content with threatening the fabric of Australian society by fundamentally changing the dynamics and interplay between individuals in employment relationships, and in other relationships for that matter. No, this government has decided that, when it comes to the funds that through this bill will provide for the ongoing superannuation liabilities of the Commonwealth, it will insert a clause that will give the responsible ministers scope to direct the Future Fund board to invest in a particular manner. Possibly the single most important aspect of this bill is the rules that will be established to govern the operations of the fund and its board.

Labor is not opposed to the fund—that has to be made clear. The Labor Party was the first to seriously attack the problems presented by our ageing population when it set out to establish a program of compulsory superannuation contributions. Labor members past and present know only too well the budgetary pressures that are likely to be faced in the not too distant future if we do not adequately cater for the ageing population. It is for this reason that the previous Labor government introduced the system of compulsory superannuation, and I have to say there was some foresight of this problem and support given to that decision by the trade union movement of this country. A system was introduced through which working Australians would save for their retirement to reduce the pressure on future budgets—it was a means through which ordinary Australians could save for their retirement with a degree of security.

Of itself, a system of compulsory superannuation would not guarantee that money would always be made through investment. The market fluctuates and no-one can make such guarantees in any event, but, in the main, the fear that many people had about investing in stocks and other financial assets was reduced, as superannuation funds would have the appropriate level of expertise in such matters with appropriate governance arrangements in place.

The government is setting up a future fund aimed at covering the unfunded liability of the Commonwealth when it comes to ongoing superannuation liabilities. There is no doubt that such a fund is necessary. Members on both sides of this House and the general public need only take a cursory glance at the numbers and compare the ratio of taxpayers to workers now and the expected ratio of taxpayers to workers in the future to see that it is prudent to establish such a fund.

As the Intergenerational report noted, Commonwealth spending is expected to exceed revenue 15 years from now and the gap between spending and revenue will continue to grow at five per cent of gross domestic product by 2041-42. There is a need to put some money aside to fund such a yawning gap between expenditure and revenue. There is a need to share the burden so that, through our own inaction, we do not create a considerable intergenerational inequity.

Of course, the important difference between the fund that will be established by the Future Fund Bill 2005 and the fund established to manage superannuation for future retirees relates to the government’s requirements of the proposed Future Fund. The arrangements that the government proposes to establish through this bill are merely a shadow of those which should be in place. I would have thought that the amount of money that is to be in the hands of the Board of Guardians would have compelled the government to make sure that appropriate checks were in place.

I would also have thought that, when it comes to managing a multibillion dollar fund of taxpayers’ money, there would be similar types of governance rules to those that apply to fund managers of other superannuation funds. Instead, what do we get? We have a bill before us that will establish a fund that is supposed to cover the unfunded superannuation liabilities of public sector employees and that does not need to subscribe to the same rules as other organisations. Despite the Future Fund being set up to receive some $18 billion in seed capital, it will not be held to the same standards as other superannuation funds. The $18 billion will be handed over to the Board of Guardians and a new statutory agency—the Future Fund Management Agency—yet it will not have the same requirements on its governance arrangements as a small industry based superannuation fund has.

The Board of Guardians and the management agency will be given a huge responsibility. They will be tasked with the job of taking the pressure off future budgets by reducing or possibly eliminating the risk of future generations facing higher taxes to cover the retirement of this generation. They will be tasked with the job of managing, investing and accumulating funds so that ongoing superannuation liabilities of the public sector will be taken care of. They are being tasked with the job of making sure that when the time comes to draw upon accumulated funds, some time around 2020, the money will be there and that the public will not have to choose which projects or what type of spending will have to be cut.

Quite frankly, this is a pretty big deal. Of course, the Board of Guardians will be required to do all of this while having to fulfil the request of the ministers responsible for this bill. So it could be a case of one eye on the investment goals of the fund and the other on the investment whims of the ministers in charge. Mr Deputy Speaker McMullan, I do not know about you, but it concerns me that a group of people in charge of this fund will not be held to the highest standard of governance on investing, managing or accumulating public funds.

Clearly, the government has in the back of its mind that there will be so much money in this fund that it will not be able to resist the temptation to use it at some stage, and therefore a backdoor measure of accessing the amount of accumulated funds is being placed in this bill. I am sure that is the reason why the government has decided that the board will have a statutory obligation to maximise the fund’s return over a longer term—a pretty logical requirement, I might say—and that the statutory requirement will be subordinate to the investment parameters set out by the government through the responsible ministers.

As difficult as it may appear, section 20(1) of the bill requires the board to take all reasonable steps to ensure that all policy and decisions regarding the operation and investment of the fund are in accordance with any direction and investment mandate issued by the ministers responsible, and those ministers are the final arbiters. I have to say that that is a pretty big hedge. As the ministers appoint the Board of Guardians, you would have thought that the government would have covered this off without needing to be so blatant—the government has been pretty loose in board appointments of late. Establishing this bill will simply allow ministers to appoint those persons whom they think they can trust to administer this fund—just appoint some of the Liberal Party stooges and take the pressure off. Surely a captive board would have been more adequate than putting this massive big hedging arrangement into the scheme for the Future Fund.

However, it seems that recent events have stung the government. They have been caught out once too often and now they are keen to cover off every possible angle through legislation—just like they did when, through the Work Choices act of 2005, they redefined ‘duress’ for the purposes of industrial relations. With the Future Fund, they are making sure that the primacy of ministers to direct investment strategies cannot be challenged. As we all know, the government have never been fans of appropriate levels of oversight and governance. Mr Deputy Speaker, you only need to look at the types of projects that were approved under the Regional Partnerships program or at what the Australian Wheat Board seems to have been able to get away with to see that ministers in this government do not like to be held to account.

But to set up a fund that is based on some fundamental principle that is different from the principle that applies to managing other superannuation funds—and bear in mind this fund will by that stage probably be in receipt of more than $100 billion of taxpayers’ money—and putting these caveats on it is contrary, in my expectation, to how the Future Fund would operate as it was originally announced in the budget.

I would have thought that a more prudent approach by the government—a government that does not have a reputation for the most transparent and appropriate use of public moneys—and a better idea would have been for the Board of Guardians to be placed at arms length. If the opportunity to override the board and to issue investment mandates were not low enough standards in governance, the Treasurer has now managed to set an even lower bar on this arrangement. Once again, learning the lessons of his colleagues, the Treasurer has decided that it is not good enough to make sure that the board is compliant. An added surety, section 56(1), requires the board members only need apply the degree of care and diligence that a reasonable person would exercise.

Unlike a superannuation trustee, who is required to apply the ‘prudent man’ rule when it comes to managing, investing and protecting taxpayers’ money, this government has set a lower standard of governance or requirement of persons who sit on the board. Under the prudent man rule, superannuation trustees are required:

… to exercise the degree of skill, care and diligence of an ordinary prudent person dealing with the property of another for whom the person felt morally bound to provide.

While the governance arrangements surrounding the Future Fund are critical to its proper operation, another important aspect of the fund outlined in the bill is where the money is coming from and how it will be accessed. The Treasurer, in his second reading speech, noted that seed capital of $18 billion is to be provided by the government in July to get the ball rolling. From then, the contributions of realised surpluses will proceed and the assets of sales will be credited to the fund. The bill goes into some detail about the crediting of moneys to the fund and the maximising of funds to be invested at any point.

Interestingly, though, there has been no detail provided about how government intends to make the biggest credit to the fund: the proceeds from the sale of Telstra. The 2005-06 Mid-Year Economic and Fiscal Outlook assumes that the sale of Telstra will be concluded and the full value of $26.6 billion will be received by the government. We all know that that value is unlikely to be achieved, based on the most optimistic view of the Telstra share price.

I do not know that too many domestic or international share markets are ready to buy nearly 6.5 billion shares of Telstra at the moment. The issue at hand is not really whether the market can bear an influx of Telstra shares; the issue continues to be—as it always was for this government—a case of accountability and detailing the plans. Late last year the Treasurer outlined that, if the full sale of Telstra did not go ahead—which was likely—the Future Fund would hold the Telstra shares and earnings allocated to the fund rather than the budget. I imagine that the plan of the Treasurer is also that the fund progressively dispose of the holdings of Telstra so that the government does not continue to indirectly own Telstra through the Future Fund. The whole process is a little unclear. It seems that the use of the Future Fund is in some way, as I said from the outset, being used as a halfway house, while either the Telstra share price or the market actually adjusts. Those things have simply not been well thought through.

Should this occur, what role would the government continue to play through its ongoing ownership of what may be a significant share in Telstra, while the fund holds the bulk of these unsold Telstra shares? What sort of impact will ongoing ownership by the government of unsold Telstra shares, through the fund, have on the government’s regulatory role when it comes to Telstra? These things have not been detailed. The issue of Telstra is not the only question when it comes to investment strategies of the fund. The Treasurer, in his second reading speech on the Future Fund, said, ‘It is a financial assets fund.’ That is, it is not an investment in non-financial assets, except through indirect means such as a pooled investment vehicle through trusts et cetera. He further stated, ‘It is not to invest directly in holdings of property or infrastructure.’

I am of the view that this element of the fund’s operation is unnecessarily restrictive, at least in the short to medium term. The government has been clear that the fund is unlikely to be drawn upon until 2020—that is now some 14 years away. I understand that, when the time of drawing on the fund occurs, the desire to have liquidity certainly increases. By the time we roll around to 2020 there will need to be a relatively liquid fund so that it can be easily drawn upon, not risk based capital needing to be liquidated quickly with the prospect of probably not gaining the most satisfactory results in superannuation payments. At that time, having the fund hold the vast majority of its assets in a liquid form is not an unreasonable request. Despite the need to have a greater degree of liquidity in the future, I do not think in the medium term that an investment strategy of the fund should be so restricted. There is a need for investment in infrastructure, an investment in the infrastructure that is necessary to increase productivity and continue to build this nation.

In saying that I believe that, subject to ordinary prudency checks and commerciality considerations, there may be a role for the Future Fund in investments that build capacity. I do not believe that it is necessary to restrict the type of assets the fund can hold to any one class of investment. (Time expired)

 

 

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