Decade ban on Future Fund raids

The $130 billion Future Fund will be quarantined for up to a decade to prevent a premature raid on its coffers.

Federal Treasurer Scott Morrison. Picture: Kym Smith

The $130 billion Future Fund will be quarantined for up to a decade to prevent a premature raid on its coffers and a spiralling bill for generations to come in covering the cost of public ­servants’ lavish defined-benefit superannuation payouts.

Scott Morrison will reveal in Tuesday’s budget that he will delay drawing down on the fund until at least 2026 so the government can cover the full cost of the unfunded liabilities.

The move will force the government to use further borrowings over the medium term to partly pay for what will increase to an $8bn-a-year cost to the taxpayer.

In an exclusive pre-budget interview with The Weekend Australian, the Treasurer said the Future Fund did not yet have enough resources to cover the full cost of the public-sector superannuation payouts, and that starting to draw it down from the legislated date of July 1, 2020, would drain the fund.

He said it made no sense to draw down the Future Fund’s assets, which have been earning 7 per cent a year, when the government could borrow for no more than 2.8 per cent.

“I’m doing this to respect ­future taxpayers,” Mr Morrison said days out from handing down his second budget.

“Ten years or 15 years down the track, the unfunded super liability problem would still be there. We want the Future Fund to be able to do the job for which it was set up.”

The decision has received the backing of former treasurer Peter Costello, now chairman of the Future Fund.

He said putting off the mat­urity date would allow the fund, the seventh-largest sovereign fund in the world, to grow to a forecast $300bn by 2030.

“Scott has decided wisely to delay the draw down … so the fund can continue to grow and provision for these liabilities right up until 2050,” Mr Costello told The Weekend Australian.

“It is very prudent … it gives the Future Fund the opportunity for the fund to provision for all generations.”

Mr Morrison said the decision carried a lesson for Labor that the Future Fund was not there to finance recurrent spending.

“If we’re serious about not putting an unfair burden on a ­future generation, then let the Future Fund do its job and don’t touch it,” the Treasurer said.

“A Labor treasurer at a whim could raid the fund and that would cost future generations.”

The decision will add to both the budget deficit and to the government’s debt beyond the forward estimates, but Mr Costello supported the decision to use medium-term borrowings to cover the interim liabilities until the fund builds, allaying concerns that the government’s determination to reduce its debt could encourage it to tap into the fund at the earliest date.

“If we were to delay draw down to 2026, we would expect we could build it to $300bn by 2030,” Mr Costello said. “It will cover the cost of all unfunded ­liabilities and save the budget tens of billions of dollars a year … it would take all those ­liabilities off the taxpayer for good.”

Mr Morrison said the ­additional debt required to cover the superannuation payouts would be incurred at a time when the budget was returning to surplus and the overall level of net debt was declining. The December mid-year review papers show that net debt peaks at 19 per cent of GDP in 2018-19.

He said the cost to the budget cash balance would be about $200 million in 2020-21, with this arising because budget rules do not allow the ­government to book the unrealised gains on the Future Fund’s share and infrastructure portfolio.

Mr Morrison has also agreed to Mr Costello’s request to lower the Future Fund’s target return of between 4.5 per cent and 5.5 per cent on top of the consumer price index as mandated, with these rates to be reduced by 0.5 per cent.

Although the Future Fund has bettered its target return over its first 10 years of operation, it has been helped by the long fall in global interest rates.

With interest rates rising, Mr Costello has argued that the target return could be met only by taking excessive risks with the investment portfolio.

“It is still going to be a very challenging mandate but more ­realistic,” Mr Costello said.

He established the Future Fund in early 2006 to set aside some of the big budget surpluses generated by the mining boom to help cover the cost of defined benefit public sector superannuation schemes. The last of these schemes was closed to new members in July but the payouts do not peak until 2049-50, when they reach $20bn a year, while the liability will not be fully paid out until about 2100.

Mr Morrison said the Howard government had anticipated that, by 2020, the Future Fund would have accumulated sufficient capital to meet all superannuation needs. It did not anticipate that its $60bn injection to the fund from its budget surpluses and the sale of its remaining stake in Telstra would be the final contributions from any government.

The continuous budget deficits since 2008-09 have left no surpluses for the Future Fund.

Modelling by the Parliamentary Budget Office shows that if the government started drawing down the fund from 2020, it would be exhausted by 2052 while the outstanding superannuation lia­bility would still stand at $250bn.

The PBO estimated that deferring tapping the Future Fund for just another four years would enable it to build up sufficient assets to meet the payout needs for the remainder of the century.

Mr Morrison said the government had committed to leave the Future Fund alone only during the four-year forward estimate period but it was his “disposition” to allow it to continue building its asset base indefinitely.

While the government needed to retain the flexibility to use the Future Fund resources should interest rates change greatly, he said the budget’s medium-term projections would show the government borrowing, rather than using the Future Fund to pay superannuation.

“Until they hear further from us, their assumption should be that the Turnbull government is not touching the Future Fund,” he said. “There would have to be a change in circumstances … currently unforeseen that would take us down a different path.”

The decision to lower the fund’s target return reflects a concern that the investment outlook will become a lot more difficult as world interest rates start rising.

The long fall in global interest rates since the Future Fund began operations has generated big profits for investors in bonds, while the Future Fund had little investment in shares at the time of the global financial crisis and has made good profits from the equity market ­recovery.

Mr Costello argued that leaving the minimum target return at 4.5 per cent more than the inflation rate would force the fund to take excessively risky investment decisions. The 0.5 per cent reduction still leaves the fund exposed to a rise in global rates, however Mr Morrison said he was optimistic that Mr Costello would achieve the target.

“The fund has a very good history of bettering their mark, and so we have real confidence in Peter and the fund to hit its mark and I have no doubt that Peter will tell me when he’s bettered it,” Mr Morrison said.