What is the Future Fund and how does it work?

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In 2006, the Australian government created the Future Fund as an independently managed sovereign wealth fund with the aim of strengthening the government’s long-term financial position.

Sovereign wealth funds are special purpose investment funds owned by government.

Sovereign wealth funds hold, manage, or administer assets to achieve financial objectives, and employ a set of investment strategies which include investing in foreign financial assets.

At 31 March 2020, it was valued at $162 billion, losing $6 billion in the three months from 31 December 2020.

For the first time since the fund was created, withdrawals were allowed from 1 July 2020, despite the government having indicated in 2017 that it intended to allow the fund to accumulate until at least 2026/27 before making withdrawals.

Funds can be withdrawn from the Future Fund to cover the annual unfunded Commonwealth superannuation liabilities.

The Commonwealth’s unfunded liabilities are currently being paid out of consolidated revenue. By helping to meet these liabilities, the Future Fund will ease pressure on the government’s budget at a time when an ageing population is likely to place significant pressure on its finances.

From 1 July 2017, the fund’s Investment Mandate was to achieve an average annual return of at least the Consumer Price Index plus 4 to 5 per cent per annum over the long term, with an acceptable but not excessive level of risk.

The fund has received contributions from a combination of budget surpluses, proceeds from the sale of the government’s holding of Telstra and the transfer of remaining Telstra shares.

Has it worked?
The goal of the Future Fund was to grow at a rate faster than the growth in unfunded liabilities, so the impost on future budgets could be reduced.

According to RiceWarner, over the 10 years to June 2019, the Future Fund earned an impressive 10.4 per cent a year. The assets held against unfunded liabilities were now $163 billion. However, the unfunded liabilities were over $400 billion, so the gap has widened considerably!

However, it is expected that if the Future Fund continues to deliver strong returns (no certainty given the current economic climate) and public sector wages don’t inflate more than expected, the gap will narrow in future years.

Do you think the Future Fund has been a success? Or has it robbed the government of the chance to spend on important projects and infrastructure?

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Written by Ben



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