What’s on the Future Fund’s Horizon?

Ashby Monk

I noted earlier this week that Australia, as part of the Henry Review, is considering launching a new commodity SWF to help manage the country’s mining rents. It’s a proposal that has the support of a variety of stakeholders. Interestingly, a new report out by The Institute of Chartered Accountants in Australia makes a strong case for the new fund. Entitled “Fit for the Future: Challenges for the next generation of Australians” and written by Saul Eslake, the report has this to say:

A commodity fund could “provide a more politically acceptable way of running tighter fiscal policy as the economy approaches full employment of labour and capital (that is more acceptable than simply piling up cash at the Reserve Bank) and thus of reducing the burden that would otherwise fall to monetary policy to contain inflationary pressures. An Australian sovereign wealth fund could be readily administered by the Future Fund, established by former Treasurer Peter Costello to accumulate assets in order to meet future public service pension liabilities. An Australian sovereign wealth fund could also help to ameliorate public disquiet about equity investment in Australian resources projects by foreign state-owned enterprises or sovereign wealth funds, either by taking stakes in overseas enterprises or even (under clear and rigorous guidelines) taking stakes in Australian resource projects.”

In short, Eslake envisions using the Future Fund as an asset manager for the new commodity fund; much the same way NBIM is the GPF-G’s asset manager in Norway. Looked at another way, this proposal would see the Future Fund’s mandate (and size) expand dramatically. It would have two primary objectives: 1) to pay future public service pensions, and 2) to stabilize resource wealth and facilitate inter-generational savings. This would make the Future Fund the first—that I can think of—hybrid SWF; it would be part pension reserve fund and part commodity fund. The question then is how the governance system would need to be designed to ensure that both objectives are achieved. In my experience, that could be tough…but doable.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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