Overview

The Future Fund was established in May 2006 to strengthen the Commonwealth’s long term financial position by making provision for unfunded superannuation liabilities of Commonwealth employees that will become payable during a period when an ageing population is likely to place significant pressure on the Commonwealth’s finances.

The Future Fund Act 2006 allows the Future Fund to be drawn down by the Government to cover unfunded superannuation cash payments from whichever is the earlier of:

• the time when the balance of the Fund is greater than or equal to the target asset level (that is the amount that is expected to offset the present value of projected unfunded superannuation liabilities), or
• 1 July 2020.

As at February 2017, the Government has not announced when or to what extent it proposes to draw down on the Future Fund. The 2016–17 Mid-Year Economic and Fiscal Outlook (MYEFO) is based on the technical assumption that the Fund will be drawn down to the maximum extent permissible from 1 July 2020.

If the Government decides to draw down the Future Fund from 1 July 2020 to meet its unfunded superannuation liabilities, assuming the Future Fund continues to meet its target investment return, the PBO projects that the assets of the Future Fund would be exhausted by 2052–53 while, based on official projections, the Government’s unfunded superannuation liability would stand at $249.0 billion. If the Future Fund’s investment returns were to be lower than assumed in the PBO’s analysis, under the 1 July 2020 drawdown scenario the assets of the Fund would be exhausted sooner than 2052–53.

If the Government chooses to defer drawdowns from the Future Fund until the value of the Fund is sufficient to offset the Government’s unfunded superannuation liability, the PBO projects that the Fund would meet the annual unfunded superannuation payments on an ongoing basis. This would be achieved by deferring drawdowns until 2024–25 based on the Fund meeting its target investment return over the projection period.

Assuming the Fund continues to meet its target rate of return, the PBO projects that deferring drawdowns from the Fund until 2024–25 would result in the Commonwealth’s net financial worth being 3¾ per cent of GDP higher by 2054–55, compared to the 1 July 2020 drawdown scenario. Net financial worth includes all of the Government’s financial assets and liabilities, unlike net debt which excludes the Future Fund’s unrealised equity investments and the Government’s unfunded superannuation liability.

The PBO’s analysis is based on the central assumption that the Future Fund’s investment returns will continue to exceed the Government’s cost of borrowings. If, due to a less favourable investment climate, Future Fund investment returns were lower than assumed in the analysis, drawdowns from the Fund would need to be deferred further in order for the Fund to be sufficient to offset the unfunded superannuation liability and meet the annual unfunded superannuation payments on an ongoing basis. In these circumstances, provided the Future Fund’s investment returns continue to exceed the Government’s cost of borrowing, deferral of drawdowns would still improve the Commonwealth’s net financial worth.

Greater exposure to financial markets under a deferred drawdown policy could result in some increased short-term volatility in the budget aggregates. In the longer term the matching of the long-term Future Fund asset with the long-term unfunded superannuation liability could be expected to benefit the Commonwealth’s net financial worth.

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