The chairman of Australia’s Future Fund, Peter Costello, has clarified his views on how the sovereign wealth fund might manage superannuation savings after widespread criticism of his suggestion that it could be a suitable vehicle for default fund contributions.

Costello, a former government treasurer, had previously suggested that the Future Fund could provide a safety net fund for default superannuation contributions. In October 2017, Costello said allocating compulsory super contributions to a “national safety net administrator” would provide “huge economies of scale” and added that the Future Fund could be used to manage those assets.

But Future Fund chief executive David Neal subsequently tried to distance the fund from the chairman’s stance and at a briefing on Monday, Costello himself responded to recent criticism by backtracking on his original comments.

“The Future Fund is a sovereign wealth fund. It is not open to the public, it is not a superannuation fund and it doesn’t aspire to become one,” he said in a conference call on the fund's recent performance.

He explained the Australian government is "wrestling with who should be the default fund when a person does not choose any fund."

Every Australian is entitled to choose their superannuation fund provider but many people simply don’t. “We are talking about a group of people who resist any effort to make them choose,” Costello said.  

“The Future Fund is not angling for this money, let me be very clear about that,” he added, but then qualified this by noting how money going into a public default fund would have to be put out to managers. “The Future Fund could be of assistance to a public default fund in working out asset allocation, recommending managers, or maybe even having a wholesale role,” he said.

Industry professionals spoken to by AsianInvestor say Costello’s idea for the Future Fund is not practicable in the fund's current form. But Costello's retort is that the “debate has not been well understood and I think there have been people who have mischaracterised the whole thing.”

The official line now from the Future Fund is that the default solution “is a matter of government policy”.

Costello said, “I don’t know whether the government will find the idea attractive or not, but it would dovetail well with the Hayne recommendation that there should only be one default fund, and once you’re in one, that should be your default fund for life."

VOTING ITS SHARES

In the light of the recent fallout in Australia’s banking sector resulting from the Hayne Royal Commission and the resulting Hayne Report, Costello also made it clear that the Future Fund takes its shareholder voting rights seriously.  

“We have been voting against what we regard as inappropriate remuneration structures,” he said, highlighting National Australia Bank, where in 2018 over 80% of shareholders voted against directors’ remuneration – the highest-ever vote in Australian shareholder history. “That was a clear message sent by institutional investors,” he added.  

Costello also pointed to what he sees as “a cultural problem” inside the two main financial services regulators, the Australian Prudential Regulation Authority and the Australian Securities and Investments Commission, as part of the reason why banks were able to get away with the poor behaviour highlighted by the Commission.

The regulators have complained about a lack of resourcing, but Costello said they don’t need more funding, they just need to do their jobs.

“It’s an easy thing for the regulators just to say 'we could have done more, but we didn’t have enough money'. To be frank, I don’t think it was because they lacked a few million [dollars] here and there. I think there was an attitude that they didn’t want to take on enforcement. They had a policy outlook that said we won’t take it on.”

David Neal, Future Fund

CAUTIOUS AND DIVERSIFIED

Defending the Future Fund against recent accusations that industry superannuation funds regularly produce better performance numbers, Neal pointed out that the Future Fund takes substantially less risk than most balanced funds and over a 10-year period has still outperformed them.

In 2018, the fund returned 5.8% for the year compared with a median balanced fund return of 0.6% and an upper-quartile balanced fund return of 1.4%. The 10-year return for the fund has been 9.7% per year.

Neal explained the reason the fund is able to outperform its peers in this way is because of its strong focus on diversification, “and that’s why you see fewer listed equities than a lot of other funds. We have less exposure to market risk than many, and more exposure to skills that can add value.”

Neal pointed, in particular, to real assets, infrastructure and “a substantial exposure to credit because it’s another diversifying exposure and an opportunity for a skilled manager to add returns.”

Chart: FUTURE FUND ASSET ALLOCATION - 31 December 2018