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Jim Boynton  
Partner
T +61 2 9296 2086

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Sydney
Jim Boynton  
Susan Hilliard  
Mark McFarlane  
Barry McWilliams  
Damien Richard  
Rowan Russell  
Anna Judkins  

Melbourne
John Malon  

Canberra
David Briggs  
Stephen Jaggers  

Hong Kong
Richard Mazzochi  (馬紹基)

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The Australian Government’s Future Fund aims to fully underwrite the Commonwealth’s unfunded public service superannuation liabilities. The liabilities are expected to grow to around A$140 billion by 2020. The Fund will be seeded with A$18 billion by 30 June 2006. The Fund presents opportunities for local and overseas investment managers.

Issues for investment managers

Issues for investment managers wishing to manage the Fund’s assets include:

• the Fund’s investment objectives and restrictions and tax concessions (see below)
• the Fund’s investment mandate and in particular, its policies on risk and return and asset allocation
• the policies of the Fund’s Board of Guardians on investment strategies, benchmarks and standards, risk management and international best practice
• the requirement that the Board ensure that the manager “operates within” the Act
• standard clauses that are likely to be included in contracts with the Board to satisfy government policy.

Similar issues will also arise for other service providers such as custodians wishing to provide custody, prime brokerage or securities lending services.

Investment objectives

The Fund’s Board of Guardians must seek to maximise the return earned by the Fund over the long term, consistent with international best practice. It must take reasonable steps to comply with the Fund’s investment mandate. The mandate will be set by the Treasurer and the Minister for Finance and Administration. The Treasurer’s Press Release No. 015 confirms that “the Board will be required to seek a long-term benchmark for real returns of between 4.5% and 5.5%”.

Investment restrictions

The Board must invest through investment managers who undertake to invest on behalf of the Board or as otherwise approved by the Treasurer and the Minister for Finance and Administration. The Board is restricted to investing in financial assets, and so must not invest directly in infrastructure projects or property. It can acquire a maximum 20% stake in an Australian company with more than 50 members, an Australian listed managed investment scheme or a foreign listed company. The 20% restriction does not apply to shares in companies with 50 or less members, a transfer of Commonwealth-owned assets (eg Commonwealth-owned Telstra shares) or a gift of financial assets.

In addition the Board:

• cannot borrow, except in very limited circumstances (eg short term to cover settlements)
• can acquire derivatives, but not for the purposes of speculation or leverage
• can enter into securities lending arrangements
• can only pay money out of the Fund in specified circumstances.

Tax concessions

The Board is exempt from income tax and so the Fund’s investment income will not be subject to income tax. Despite the exemption, the Fund will be eligible for franking credits. The Fund will be unable to benefit from tax deductions and this may affect the attractiveness of some investments. The Board is exempt from tax under any State or Territory tax law (such as stamp duty) unless the Commonwealth is subject to the tax.

The Board of Guardians

The Fund itself will not have a separate legal identity. Its Board will be a body corporate with a separate legal identity from the Commonwealth. On 30 March 2006 the Government announced the appointment of six part-time members of the Board to join Chairman David Murray. A new government agency to be called the Future Fund Management Agency, will assist and advise the Board. David Murray will also be Chief Executive Officer of the Agency. The Agency will be based in Melbourne.

Tendering

The Board and the Agency must comply with the Commonwealth Procurement Guidelines. The guidelines set out the Government’s expectations of all relevant departments and agencies when engaging in the procurement of property or services. Generally, procurements with a value of over $80,000 will require a public tender program. We expect the Board to seek an exemption from these requirements for investment management services. The Commonwealth Superannuation Scheme and the Public Sector Superannuation Scheme Boards have such an exemption.