EXPLANATORY STATEMENT
Objective of the Directions
As stated in the Future Fund Act 2006 (the Act), the Government has established the Future Fund (the Fund) to strengthen the Australian Government’s long-term financial position by making provision for unfunded superannuation liabilities that will become payable during a period when an ageing population is likely to place significant pressure on the Government’s finances.
Under the Act the Board is responsible for seeking to maximise returns on the Fund over the long-term. This responsibility is subject to any restrictions placed on the Fund by the Act and to any directions given by the responsible Ministers under subsection 18(1) or clause 8 of Schedule 1 of the Act. Directions issued under subsection 18(1) of the Act are known collectively as the investment mandate.
Directions
In setting this investment mandate the Government has employed the principle that any restriction placed on the investment of the Fund will lead to some increased risk or lower return or some less favourable trade-off between the two. As such, restrictions are only imposed where there is a sound public policy or national interest reason to do so.
Benchmark return
For the purpose of this investment mandate, the Government has directed the Board to adopt, as the long-term benchmark for the performance of the Fund, an average return over the long-term of at least the Consumer Price Index (CPI) + 4 per cent to
+ 5 per cent per annum.
The Government is conscious of the risks inherent in investing a large portfolio of financial assets and acknowledges that in practice this will involve some short-term volatility in the Fund’s returns, including the possibility of losses in some years. In targeting the long-term benchmark, the Board is directed to determine an acceptable but not excessive level of risk for the Fund. This level of risk should be measured in terms such as the probability of losses in a particular year.
Section 55 of the Act requires the Board to keep the Ministers informed of the operations of the Board and give the nominated Minister such information in relation to those operations as is appropriate. This could include information the Board considers to be relevant on any significant changing circumstances of the Fund or broader financial markets.
Limits for holding of listed companies
The Act sets out a number of legislative restrictions in relation to the investment of the Fund. Sections 21 and 22 of the Act prohibit the Board from triggering the takeover provisions under the Corporations Act 2001 and restrict the Board from holding a stake of more than 20 per cent in any foreign publicly listed company.
To provide the Government with comfort that these legal restrictions will be met, the investment mandate directs that the Board must establish a practical working limit to prevent a breach.
Board must consider impacts from its investment strategy
The Government has a broad obligation to the Australian community to make decisions that are economically and fiscally responsible. In establishing the Fund it is the expectation of the Government that the investments of the Fund should not disrupt the normal operation of domestic financial markets. The Board, in setting the investment strategy and in instructing the investment of the Fund, must act in a manner that minimises the potential to effect any abnormal change in the volatility or efficient operation of Australian financial markets.
The Board is also required to act in a manner that is unlikely to cause any diminution of the Government’s reputation in Australian and international financial markets.
The Government participates in a number of international organisations which pursue high standards of conduct in financial markets. The Government recognises that the Board will invest in international capital markets as part of a sound investment strategy involving diversification. In doing so, the Government expects that the Board will act in a manner that is unlikely to cause embarrassment to the Government.
Corporate governance
In undertaking its investment functions, the Board must act consistent with, and establish policies on matters relevant to, international best practice for institutional investment. In particular, the Government would expect the Board’s policies to include its approach to corporate governance principles, including voting its shares.
Overview
The Future Fund Act 2006 was enacted to address the long-term financial challenges posed by the Australian Government's unfunded superannuation liabilities, particularly in the context of an ageing population that is expected to exert substantial pressure on public finances. The Act establishes the Future Fund, with a mandate for its Board to maximize long-term returns, subject to restrictions outlined in the Act and directions from responsible Ministers. The explanatory statement accompanying the 2017 Directions under this Act highlights the principle that restrictions on the Fund's investment are implemented only when there is a compelling public policy or national interest justification. The Government has set a long-term benchmark return for the Fund of at least the Consumer Price Index plus 4 to 5 per cent per annum, while acknowledging the associated risks and potential for short-term volatility. The Directions also detail legislative restrictions on the Fund's investments, such as limitations on holdings in listed companies, and impose a duty on the Board to avoid disruptions to financial markets and to uphold the Government's reputation through adherence to international best practices in corporate governance.
Scope and Application
The Future Fund Act 2006 applies to the Future Fund (the Fund), which was established to address unfunded superannuation liabilities that will become payable as the Australian population ages. The Act primarily governs the Board responsible for managing the Fund, outlining its mandate to maximise returns over the long term while adhering to any restrictions imposed by the Act and any directions given by the responsible Ministers. The Act applies to the Board and its investment strategies, as well as to the entities and industries involved in the Fund's investments. Geographically, the Act operates under the jurisdiction of the Commonwealth, aiming to influence the long-term financial stability of the Australian Government. The Act includes specific legislative restrictions, such as prohibitions on triggering takeover provisions under the Corporations Act 2001 and limits on stakes in foreign publicly listed companies, which are reinforced by the investment mandate. The mandate also sets a benchmark return target of at least CPI + 4 to 5 per cent annually and mandates the Board to maintain appropriate levels of risk. The Act further stipulates that the Board must consider the impacts of its investment strategy on domestic and international financial markets, aiming to avoid disruptions and maintain the Government's reputation. The Board is also required to adhere to international best practices in corporate governance.
Key Provisions
The main operative sections of this legislation (sections 18(1) and 8) establish the investment mandate for the Future Fund, specifying the long-term performance benchmark (section 55) and the restrictions on investment (sections 21 and 22). The mandate requires the Board to aim for an average return over the long term of at least the Consumer Price Index (CPI) plus 4 to 5 per cent per annum. The Board is also directed to maintain a practical limit to prevent any breaches of the legislative restrictions, such as avoiding triggering takeover provisions under the Corporations Act 2001 and holding no more than a 20 per cent stake in any foreign publicly listed company. Additionally, the Board must ensure its investment strategy does not disrupt domestic financial markets, diminish the Government's reputation, or cause embarrassment on the international stage.
The Act imposes several obligations on the Board, including the requirement to keep the Ministers informed about the operations of the Board and to report on any significant changing circumstances of the Fund or broader financial markets (section 55). The Board must also establish policies consistent with international best practice for institutional investment, particularly in relation to corporate governance principles. Moreover, the Board is directed to minimise the potential for abnormal changes in market volatility and efficient operation due to the Fund's investments. This includes adhering to the legislative restrictions on investment and setting practical limits to avoid breaches.
Failure to comply with the provisions of this legislation could result in significant consequences. Although specific penalties are not outlined in the explanatory statement, breaches of the Act could lead to civil or criminal liability, depending on the nature and severity of the infraction. For instance, if the Board were to trigger takeover provisions under the Corporations Act 2001 or hold more than a 20 per cent stake in a foreign publicly listed company, these actions could result in legal repercussions. Similarly, any failure to act in accordance with international best practices or to keep the Ministers appropriately informed could also lead to penalties. The exact penalties would depend on the specific provisions of the Act and the circumstances surrounding the breach.