Peter Costello backs superannuation guarantee rise rethink, as Future Fund posts negative return

Peter Costello says it’s right that the super guarantee rise be reassessed, as the Future Fund posts a negative 0.9pc return.

Future Fund chairman Peter Costello. Picture: AAP

Future Fund chairman Peter Costello believes the rise in the superannuation guarantee to 12 per cent should be revisited, arguing “everything has changed” since the COVID-19 pandemic.

He also confirmed the $161bn sovereign wealth fund had.

The former federal treasurer and Liberal Party veteran was speaking after the release of the Future Fund’s latest performance for fiscal 2020, with the fund blaming the impact of pandemic for its worst financial performance since it was launched 14 years ago – a negative return 0.9 per cent.

Mr Costello said he disagreed with the argument that holding back the staggered increase from 9.5 per cent to 12 per cent over the next few years would somehow wreck the industry or its returns. He said the environment had radically changed because of the pandemic, which demanded new policy settings.

“The increase in the superannuation guarantee I think needs to be assessed in the light of the current economic environment, where you have situation unemployment is high, business profitability is going to be affected and you can’t just sort of say what looked good a few years ago is good in the current climate,’’ Mr Costello said.

The rate is legislated to lift from the current 9.5 per cent of wages to 12 per cent between 2021 and 2025, although this was put in place well before the economy was wrecked by COVID-19.

The federal government is now reviewing if the rate should still go up.

“And I think the government is right to reassess it, to look at it very carefully. I won’t pre-empt what I think what the outcome might be, but this idea that something got set in stone several years ago and we have to therefore follow through with it I think is wrong,’’ Mr Costello said.

“Everything has changed in the last year because of the pandemic and because of the economic shutdown and I think tax, fiscal policy, monetary policy all has to be reassessed in the light of that.’’

He said while it made sense to invest tens of billions of dollars in infrastructure projects to drive economic growth and efficiencies, with the RBA recently supporting the strategy of around $40bn in infrastructure investment by all governments, the projects had to make sense and deliver long term gains not just a “sugar hit” of quick jobs.

Mr Costello discounted the likelihood of the Federal government drawing down on funds from the Future Fund as it battled the economic shock from COVID-19, arguing the fund actually made money for the government.

“At the moment of course the way the government is funding itself is with borrowings and when you can borrow at 1 per cent as you can on 10 year bonds or 1 per cent on 30 year bonds, the government has got no trouble funding itself and in fact the government makes money because if it can borrow over ten years at 1 per cent and the Future Fund can return over 10 years 6 per cent then the government is actually making money.

“And that is why in fact I think the government doesn‘t draw down on the Future Fund because it makes more money by keeping that money in the Future Fund.’’

Although the fund missed its benchmark return in 2020, Mr Costello said over the long run it was exceeding the target.

Mr Costello was speaking after the Future Fund reported a negative 0.9 per cent return for fiscal 2020. However the nation’s sovereign wealth fund said that despite the fall, its 10 year return of 9.2 per cent per annum exceeded its benchmark target of 6.1 per cent per year.

The “target return” for 2020 was a positive 3.7 per cent.

The Future Fund said it had rebalanced its portfolio to a neutral stance in the face of volatility and uncertainty in the global economy, and also reduced its risk appetite in its private equity portfolio. Cash reserves had lifted sharply, as assets fell slightly.

The Future Fund is now sitting on funds of $161bn and in 2020 earned over $100bn on $60.5bn of capital. Total funds under management, which includes the Medical Research Future Fund, now stands at $205.1bn.

In terms of its spread of assets, the Future Fund ended fiscal 2020 with 19.1 per cent of its fund invested in global equities (developed markets), 8.1 per cent in emerging markets, 15.2 per cent in private equity, 12.9 per cent in alternative assets and 6.8 per cent in Australian equities. It had 17 per cent in cash, equivalent to $27.404bn.

Mr Costello said returns for the fund in the second half of the year had been hit by the outbreak of COVID-19.

“The second half of fiscal 2020 was dominated by the COVID-19 pandemic and the lockdown of much of the Australian economy by governments in response.

“The global economy went into reverse and the Australian economy moved into recession for the first time in 30 years. The downturn was fast and steep.”

Mr Costello said the Fund’s return of negative 0.9 per cent came after what was, in many respects, an unprecedented year.

“The Future Fund is a long-term fund and its portfolio is designed to ride out short-term events and focus on long-term performance.

Market volatility contributed to the fall in Future Fund returns. Picture: AAP

“The board is focused on positioning for what will be a challenging and volatile environment in the future.

“The factors that have fuelled strong performance in the past may not be there any longer. We will need to be ever more strategic in how we pursue long-term returns in the future.

“We will continue to prioritise portfolio flexibility, ensuring the portfolio is robust to a range of possible scenarios and has ample liquidity. This will open up opportunities from the current market to position ourselves for long-term returns.”

Raphael Arndt, the recently appointed chief executive, said the Future Fund remained sharply focused on its long-term objective.

“Everything we do, every decision we make is focused on investing for the benefit of future generations of Australians. Now, more than ever, we are conscious of our obligation to avoid ‘excessive risk’. The changes in the global economy and financial markets are momentous and we are positioned cautiously with risk levels just below neutral. For some time we have prioritised portfolio flexibility to ensure we can adjust the portfolio quickly to respond to emerging opportunities and risks.

“This year we undertook a material rebalance of the private equity portfolio, reducing some of our exposure to international growth and buyout managers following a period of very strong performance,” Mr Arndt said.