By guest contributor Ken Atchison, founder of Atchison Consultants
A fundamental principle with the establishment of a public policy and, in particular, an investment policy, is clarity of purpose. When the purpose is clear the tailored investment policy will flow.
In 2006, the Future Fund was established to strengthen the long-term financial position of the Commonwealth of Australia. A specific purpose was funding the unfunded Commonwealth Government public servants defined benefit superannuation liability. Withdrawals from the Future Fund, when they are made, will help the Australian Government meet obligations including the superannuation liability.
A significant inter-generational issue of funding a liability as it is incurred rather than holding future generations of taxpayers responsible for funding was addressed. Atchison Consultants assisted in this policy development.
Investment policy developed for the Future Fund reflected examination of the specific requirements of the Federal Government. It included investment objective settings and asset class selection and management within the policy. Key elements include:
Assessment of asset class strategies
Purpose
Investment objectives including financial targets
Likelihood of meeting investment objectives
A comprehensive return and volatility of return analysis was be undertaken reflecting forecast and historical investment market performance and tolerance for variability.
Tailored solutions are required specific to a fund, adopting a holistic approach which identifies the full business purpose of which the investment policy is part. Investment strategy also considered the tax status, liquidity requirements and tolerance for variability of returns.
The process of setting investment objectives and selecting asset classes is a critical part of the investment planning process especially in terms of its impact on the settings for return and volatility of returns by the government.
There is clear evidence that there is clarity of purpose, adoption of clear investment principles, engagement of high calibre people and managers and strong governance which has delivered for taxpayers in Australia through the Future Fund.
Clarity of purpose has contributed to the success of governance of the Future Fund. An initial contribution of $60.5 billion from budget surpluses, proceeds of Telstra sale and transfer of the remaining Telstra shares has grown to $224.9 billion in value at June 2024.
Australian Treasurer Jim Chalmers has announced the intention to change the investment policy. It reflects a clear intent that spending taxpayers’ money for political purposes is attractive for the current government. Bigger and activist involvement in policy will involve potential material risk. Interference with investment policy will not enhance financial outcomes and will be detrimental for taxpayers.
If national priority areas of housing, renewable energy and infrastructure require funding, do it through taxes, thereby being transparent. Victorian government failures in each of these sectors are a clear statement of incompetence of government in all these priority areas. Without significant government subsidies these areas are unlikely to meet feasibility study benchmark returns.
At a national level the experience of the establishment of the National Reconstruction Fund is evidence of poor policy.
A fundamental belief is that analysis of dynamics in financial markets is critical as the dynamics impact on financial outcomes.
Government interference in the investment policy structure of the Future Fund will lead to failure to meet the purpose of the fund, reflecting historical Federal and State incompetence of politicians and bureaucrats in management issues. Taxpayers will bear the cost through higher budget deficits and ultimately higher interest rates.
A more constructive role would be development of a policy addressing the intergenerational issue of a very large unfunded age pension liability.