Statement 6 (continued)
The Australian Government's major assets and liabilities
The Government's total stock of assets is estimated to be around $428.7 billion at 30 June 2015, increasing to $454.7 billion in 2015‑16 and $557.0 billion by the end of the forward estimates.
The Government's financial assets are estimated to be around $309.9 billion at 30 June 2015, increasing to $332.6 billion in 2015‑16 and $422.0 billion by the end of the forward estimates.
The Government's non‑financial assets are estimated to be around $118.8 billion at 30 June 2015, increasing to $122.1 billion in 2015‑16 and $135.0 billion by the end of the forward estimates.
The Future Fund was established in 2006 to accumulate financial assets and invest them on behalf of the Australian Government to address the Government's unfunded superannuation liability.
The Investment Mandate for the Future Fund sets a benchmark return of at least CPI plus 4.5 per cent to 5.5 per cent per annum over the long term. The Investment Mandate gives guidance to the Future Fund Board of Guardians (the Board) in relation to its investment strategy. The Board is independently responsible for the investment decisions of the Fund. The Investment Mandate also requires the Board to take an acceptable but not excessive level of risk for the Fund, measured in terms such as the probability of losses in a particular year.
The portfolio of assets has performed well. Since the first contribution to the Future Fund on 5 May 2006, the return has been 8.2 per cent per annum.
At 31 March 2015, the Future Fund's return for the financial year to date was 15.1 per cent. The Future Fund was valued at $117.0 billion at 31 March 2015.
The Board continues to focus on maintaining clear objectives and manages the portfolio in line with its mandate and strategy. Table 13 shows changes in the asset allocation of the Future Fund since 30 June 2014.
|Asset class||30 June 14
|31 March 15
|Infrastructure and Timberland||8,326||7,942|
|Total Future Fund assets||101,586||116,964|
Note: Data may not sum due to rounding.
Asset Recycling Fund
The Australian Government remains committed to its 2014‑15 Budget decision to establish the Asset Recycling Fund (ARF), a dedicated vehicle for providing funding and financial incentives primarily to the states and territories to invest in infrastructure, including under the Asset Recycling Initiative.
The ARF will be seeded with $6.8 billion of capital from uncommitted balances of the Building Australia Fund (BAF) and Education Investment Fund (EIF). Further contributions to the Fund will be made from proceeds from the sale of Medibank Private, to be credited on 1 July 2016, and other privatisations.
Drawdowns from the ARF for payments relating to the Infrastructure Growth Package will be made from capital and net earnings. Such drawdowns will primarily fund payments to states and territories through the Council of Australian Governments (COAG) Reform Fund, governed by the National Partnership Agreements that will include those for the Asset Recycling Initiative and Land Transport Infrastructure Projects. Pending the establishment of the ARF, the Australian Government will enable funding for infrastructure investments under the Infrastructure Growth Package by providing funding of $2.1 billion in 2015‑16 through existing appropriation mechanisms.
The ARF will be managed by the Future Fund Board of Guardians. The Treasurer and Minister for Finance will set an investment mandate for the Fund which will provide broad direction to the Board in relation to its investment strategy.
Once the ARF is established and the uncommitted balances of the BAF and EIF are transferred to the ARF, the BAF and the EIF will be abolished. Remaining committed milestone payments of the BAF and EIF will be transferred to consolidated revenue to continue to be paid based on contractual obligations under the responsibility of the relevant department.
Medical Research Future Fund
The Government will establish the Medical Research Future Fund (MRFF) on 1 August 2015 to provide additional funding for medical research from 2015‑16.
Contributions to the MRFF will come from $1 billion uncommitted funds in the Health and Hospitals Fund (HHF), and the estimated value of health savings from the Health portfolio until the Fund reaches a target capital level of $20 billion. The MRFF is still expected to reach $20 billion in 2019‑20.
Net earnings on MRFF capital for a given financial year will be available for drawdown the following financial year. Payments met from drawdowns will be determined through the annual budget process. In 2015‑16, $10 million will be distributed by bringing forward some of the earnings that would otherwise be made available in 2016‑17. The capital of the Fund will be preserved in perpetuity.
The MRFF will be managed by the Future Fund Board of Guardians. The Treasurer and Minister for Finance will set an investment mandate for the Fund which will provide broad direction to the Board in relation to its investment strategy.
The HHF will be abolished on 1 August 2015. Remaining committed milestone payments of the HHF will be transferred to consolidated revenue to continue to be paid based on contractual obligations under the responsibility of the Department of Health.
DisabilityCare Australia Fund
The DisabilityCare Australia Fund (DCAF) was established on 1 July 2014 to assist the Commonwealth and the State and Territory governments with spending directly related to the National Disability Insurance Scheme (NDIS). This is consistent with the commitment by governments to roll out the NDIS across Australia.
The DCAF is funded by revenue raised from the increase in the Medicare levy of half a percentage point to 2 per cent that was implemented on 1 July 2014. As at 8 May 2015 the DCAF has received credits totalling $2.5 billion.
The investments of the DCAF are managed by the Future Fund Board of Guardians (the Board). The Treasurer and Minister for Finance have set an Investment Mandate for the DCAF which came into effect from 1 July 2014 and provides guidance to the Board in relation to its investment strategy for the Fund. The DCAF Investment Mandate sets a benchmark return on the Fund of the Australian three month bank bill swap rate plus 0.3 per cent per annum calculated on a rolling 12 month basis (net of fees). In achieving its objectives, the Board must invest in such a way as to minimise the probability of capital losses over a 12‑month horizon.
A fixed amount of the money flowing into the DCAF each year is set aside (commencing from 2014‑15) for the State and Territory governments consistent with the DisabilityCare Australia Fund Act 2013. In 2015‑16, this fixed amount is $854 million, which was indexed by 3.5 per cent from the previous financial year. This amount will continue to be indexed annually by 3.5 per cent until 2023‑24.
The State and Territory governments will be able to draw down from the DCAF when they meet key conditions such as agreement to fully roll out the NDIS and milestones relating to the participation of people with significant and permanent disability in the scheme. The balance of the DCAF, after taking into account allocations to the states and territories, will be available to the Commonwealth to assist with meeting the Commonwealth's contribution to the NDIS.
Residential mortgage‑backed securities
The Government will progressively sell down its residential mortgage‑backed securities (RMBS) holdings subject to market conditions. As at the end of April 2015, the Government's RMBS portfolio was valued at $4.6 billion in amortised face value terms. Subject to market conditions, it is estimated that the portfolio could be sold down by the middle of 2016.
During the global financial crisis, the previous Government directed the AOFM to invest in high‑quality AAA‑rated RMBS to support competition from smaller lenders in residential mortgage and small business lending markets. As a result, the AOFM directly invested around $15.5 billion in high‑quality RMBS.
Conditions in the Australian securitisation market have improved substantially since the introduction of the AOFM programme. Since late 2012, private demand for securitisation had increased to the extent that the AOFM was not required to provide any direct investment in new RMBS deals. Given the improvement in the market, the previous Government announced on 10 April 2013 that the program would close for new investment.
Conditions have continued to improve since then. Around $29 billion of new RMBS was issued in 2014, the largest volume in any calendar year since the crisis. Smaller lenders are able to fund their new lending by securitisation, with over $10 billion of primary RMBS issuance by non‑major lenders since September 2014.
The RMBS market is now functioning well and no longer needs Government support. Moreover, a progressive sale of RMBS is expected to support the market by providing regular pricing benchmarks to a relatively opaque market.
National Broadband Network
The National Broadband Network (NBN) will deliver fast, affordable broadband to all Australians. The Government has instructed NBN Co Limited to complete the NBN using a multi‑technology mix (including fibre‑to‑the‑premises, fibre‑to‑the‑node, hybrid‑fibre coaxial cable, and wireless and satellite technologies), to ensure the NBN is delivered as soon as possible and at least cost to taxpayers.
On 14 December 2015, the Government announced that is has successfully renegotiated the Definitive Agreements with Telstra and Optus. These agreements secure access to existing fixed‑line infrastructure that could be used to rollout the NBN faster and at lower cost.
In the 2015‑16 Budget, $2.6 billion in equity payments for NBN Co have been brought forward to 2015‑16 and 2016‑17 from 2017‑18. This is to reflect the launch and scale of new network technologies. The Government's equity contributions are capped at $29.5 billion.
Higher Education Loan Programme
The Higher Education Loan Programme (HELP) comprises concessional loans to students that enable them to defer payment of fees for diploma level and above courses, which are paid back once earning an income above a certain level.
The fair value of HELP is estimated to be around $30.2 billion at 30 June 2015, which is $0.4 billion lower than projected in the 2014‑15 MYEFO. The fair value of HELP is projected to grow to around $52.9 billion in 2017‑18, which is $0.9 billion higher than estimated in the 2014‑15 MYEFO, and to reach $62.7 billion by the end of the forward estimates.
This growth is largely a result of the estimated underlying increase in university commencements over the forward estimates, deregulation of the higher education sector, the reduction in subsidies for Commonwealth supported places, and increased demand for VET FEE‑HELP.
From 1 January 2016, the Government will fully deregulate higher education by removing fee caps and expanding the demand‑driven system to bachelor and sub‑bachelor courses at all approved higher education providers. Supported students will continue to be able to defer the costs of their studies through HELP.
In addition, from 1 January 2016, the Government will rebalance student and Commonwealth contributions towards a new student's course fees by reducing subsidies for Commonwealth‑supported places by 20 per cent on average.
Clean Energy Finance Corporation
The Clean Energy Finance Corporation (CEFC) was established as a Commonwealth Authority in August 2012 through the Clean Energy Finance Corporation Act 2012 (CEFC Act).
The CEFC Act provides the CEFC with $10 billion over five years to invest in renewable energy, low‑emissions technology and energy efficiency projects.
Investment decisions are made by an independent board consistent with the CEFC Act and the CEFC's investment mandate.
The Government has announced that it will abolish the CEFC.
Legislation to abolish the CEFC and transfer the CEFC's existing assets and liabilities to the Commonwealth is currently before Parliament. The Government will honour all payments that are necessary as part of meeting our contractual obligations to committed investments. These obligations will be met from the CEFC's existing funding, which will be transferred to a new CEFC transitional special account.
The Government's total liabilities are estimated to be around $660.0 billion at 30 June 2015, increasing to $716.1 billion in 2015‑16 and $839.8 billion by the end of the forward estimates.
The Government's major liabilities are CGS on issue and public sector employee superannuation liabilities. For further information on CGS on issue, see the Debt Statement.
Public sector employee superannuation liabilities
Public sector employee superannuation entitlements relating to past and present civilian employees and military personnel are a financial liability on the Government's balance sheet. The Government's superannuation liability is estimated to be around $167 billion at 30 June 2015 and approximately $282 billion at 30 June 2050.
The Australian Government has never fully funded its superannuation liabilities in relation to defined benefit schemes. For civilian employees, the major defined benefit schemes are the Commonwealth Sector Superannuation Scheme (CSS) and the Public Sector Superannuation Scheme (PSS). These schemes were closed to new members in 1990 and 2005 respectively. The Public Sector Superannuation accumulation plan (PSSap) was introduced on 1 July 2005 and provides fully funded accumulation benefits for new civilian employees from that date.
For military personnel, the defined benefit schemes are the Defence Force Retirement and Death Benefits Scheme (DFRDB), the Defence Forces Retirement Benefits Scheme (DFRB) and the Military Superannuation and Benefits Scheme (MSBS). The DFRDB and DFRB are closed to new members. Legislation is being prepared which would close the MSBS to new members from 1 July 2016, with a new military accumulation scheme with death and disability arrangements to be established.
While there will not be any civilian or military defined benefit schemes available to new members from 1 July 2016, the value of the Government's unfunded superannuation liability is projected to continue growing (in nominal terms) into the immediate future — although it is projected to decrease as a proportion of GDP — and is forecast to reach $194 billion by the end of the forward estimates. The increase in the liability partly results from the time value of money which recognises future benefits being closer to maturity each year. It also results from the accruing entitlements to current members of the civilian and military defined benefit schemes.
An actuarially‑determined discount rate is used to estimate the present value of future unfunded superannuation benefits. The long‑term nature of the unfunded superannuation liability requires the use of a discount rate that best matches the duration of the liability. The value recorded on the balance sheet is highly sensitive to the discount rate used. The use of a long‑term discount rate for budget purposes avoids the volatility that would occur by using current market yields on government bonds which continually change. Consistent with the latest Long Term Cost Reports for the civilian and military schemes, the discount rate currently applied is 6 per cent per annum. This rate is in the context of a long‑term assumed rate of CPI inflation of 2.5 per cent per annum.
Civilian defined benefit schemes
Changes in member behaviour, including members increasing their member contributions and increasingly taking more of their benefit as a pension rather than as a lump sum, have also increased the liability in 2014‑15 by around $4 billion compared to previous projections for the 2014‑15 Budget.
As the superannuation liability is included in the Government's net worth and net financial worth aggregates, revaluations of the liability have an impact on these aggregates (see Statement 9: Australian Government Budget Financial Statements for further information about budget aggregation).