Future Fund chairman Peter Costello’s suggestion that the Australian sovereign wealth fund could be used to manage individual superannuation savings is getting the thumbs-down from super industry professionals.

If the Australian government adopted the idea, super experts claims, it would require massive legislative changes and radical changes to the Future Fund's asset allocation.

Costello first floated the idea of an alternative role for the Future Fund in 2017, on the basis that its economies of scale would allow savings to be managed at a lower cost.

Since then, the super industry has been subject to severe criticism from two separate high-level reviews – by the Royal Commission and the Productivity Commission.

Peter Costello, Future Fund

Industry professionals spoken to by AsianInvestor say Costello’s idea for the Future Fund would not solve the problems highlighted by the reviews. Even the Future Fund is now distancing itself from the discussion.

The Future Fund was established to cover the Australian central government's unfunded pension payments. Gabriel Szondy, former chairman of the investment committee at CareSuper, said the fund’s governance structure is totally different from traditional superannuation funds in Australia.

“It is not a trustee structure, it does not have employer or employee representation and is not governed by the many strict rules applying to super funds,” he told AsianInvestor.

The fund also lacks the necessary administration systems capable of receiving contributions en masse.

“Massive legislative changes would have to be introduced and, even then, it will not solve the (super industry’s) problems,” Szondy said. “Further, if one default fund was used for the millions of workers, competition would wither and even the Future Fund would be under little or no pressure to perform in the long run.”

The problems with the super system highlighted by the Royal Commission were largely concerned with retail funds, mostly operated by Australian banks and life insurers. At the same time, the Productivity Commission raised concerns over members having unintended multiple accounts and of employer contributions being allocated to low-performing funds by default. 

For all that, Szondy described the overall super system in Australia as “generally fine structurally and operationally.”

For him, the issues raised by the Commissions could have been avoided with greater scrutiny and enforcement by the regulators, the Australian Prudential Regulation Authority (Apra) and the Australian Securities and Investments Commission (Asic).

“Using the Future Fund as a super fund default would not address these issues,” he added.

DIFFERENT

The Productivity Commission’s preferred option for the future management of the A$500 million ($364 million) of default contributions is for an expert panel to select the 10 best funds to receive default superannuation payments.

That said, the Future Fund’s asset allocation is quite different, with good reason, to high-performing super funds in Australia. This week, the fund has faced some predictable criticism on this issue from the industry funds sector, whose performance regularly outstrips the Future Fund’s, due to their higher exposure to alternative risk assets.

The best-performing industry fund in 2017-2018 was Hostplus, which made 12.7%, according to Superratings data. Over the same period, the Future Fund returned 10.7%.

Over 40% of HostPlus assets under management is in illiquid assets, infrastructure and property, compared to less than 30% at the Future Fund.

Future Fund chief executive David Neal said the fund was comfortable with its position versus the industry funds because their risk profiles and investment horizons were different. “The top-performing funds are those that, naturally, take a lot more risk than the Future Fund,” he told AsianInvestor.

"The way we think about risk is defined by our mandate to strive to achieve returns without taking excessive risk, which we assess against a range of potential outcomes. Strategies that have a low correlation with traditional risk assets are particularly attractive, such as our venture and growth portfolio.”

NOT APPROPRIATE

Gordon Noble, a former director of investments at super funds association ASFA, told AsianInvestor he agreed that the Future Fund is "not an appropriate vehicle to manage superannuation, for a number of reasons.”

Firstly, he said the Future Fund has not been established to be able to communicate with members.

“It is not obvious that the Future Fund would have the first idea of how to build the skills required to deal with individuals in stressful situations, including dealing with an estate in the case of the death of a member or at the point of retirement.”

Gabriel Szondy

Like Szondy, he noted that the Future Fund’s investment strategy has been built without the liquidity restraints that traditional super funds face.

“The Future Fund is not required to meet redemptions to individual members and, therefore, [it] is able to invest in illiquid assets more freely. If the Future Fund was to manage superannuation assets it would have to change its asset allocation.”

NOT RESPONSIBLE

Noble also considers that the Future Fund’s record on responsible investment is “not great”.

“As an example, their attitude at board level to climate change in my view reflects a politicisation of the Future Fund that has been damaging.”

Australia’s prime minister, Scott Morrison, abandoned the country’s policy for cutting greenhouse-gas emissions when he became leader of the ruling Liberal Party in August 2018. Climate scientists say the move means the government has effectively dropped its commitment to the 2015 Paris climate agreement.

Although Costello, as chairman, has previously spoken openly about the possibility of the Future Fund taking on the role of managing default super assets, the fund is now keeping the issue at arm’s length. “Our position is that it’s a policy matter for the government. It’s not something we have a comment on”, a spokesperson for the Future Fund told AsianInvestor.