Since its inception in May 2006, the Future Fund set up to help finance the unfunded superannuation liabilities has increase by 6.8 per cent a year and now stands at more than $97 billion. The annual income - if markets hold up, but there are no guarantees of that - is running at close to $10 billion.
As portfolios go, particularly compared with similar funds established to finance long-term pension commitments, its asset allocation is concentrated in higher-risk investment, including equities and alternative assets. While not set out in the reports, a high percentage of the assets is invested overseas, reflecting the limited range of investments available locally and the, by international standards, high valuations of local infrastructure assets.
Even if the federal government is comfortable investing its last remaining large assets in higher-risk, non-Australian assets, it now has the opportunity to increase the returns on about $21 billion of cash assets in the Fund. This is to start using the Future Fund to reduce the growth of the unfunded superannuation liabilities of federal employees.
The returns from doing so, as state governments can attest, can be high compared with alternative returns available. However, there’s another reason for the unfunded super liability to be reduced as soon as possible using the Future Fund. This is that a future government in financial trouble would be tempted to dip into the Future Fund to avoid highly unpopular alternative action. The larger the fund grows the greater will be the temptation to milk it.
Tony Shepherd’s Commission of Audit saw considerable merit in accessing the Future Fund to help smooth the transition from the unfunded military pension fund to a funded accumulation fund. This is a very sensible proposal, not only because of the attractive financial benefits of doing so.
As outlined last week, a considerable number of present and past Public Sector Superannuation (PSS) and Military Superannuation Benefits Scheme (MSBS) members wanting to take their super as a lump sum would prefer their benefits to be in a fund providing rates of return higher than inflation when they leave federal employment. While this provision has short-term benefits for the Commonwealth in limiting the growth in its unfunded liabilities, it comes at a very high cost.
This is the high probability that these fund members will realise at the time of retirement that taking the indexed pension is a far better option than taking the lump sum. There already is clear evidence of this with this year’s $3 billion increase in the unfunded liability, because more people than predicted are opting to take the pension benefit. With today's low interest rates and volatile markets, further upward revisions in the unfunded liability for this reason are inevitable.
*Daryl Dixon is the executive chairman of Dixon Advisory