CHAIR —Good evening. Welcome back, Minister. Is there any opening statement?

Senator Sherry —Not from me, but Mr Costello wanted to make a couple of comments.

Mr Costello —I was only going to say to the committee that we are now well into the cycle of providing quarterly updates on the Future Fund. If the committee members have not seen the most recent update, it is something that I can go through with them. That is all I want to say.

Senator RYAN —I would like that, Mr Costello, if you are willing to do that.

Mr Costello —To summarise the last update?

Senator RYAN —Yes, please.

—Within a month of the end of each quarter, we provide a snapshot of the fund—how the money is invested, the managers that it is invested with and how it is tracking. Our last snapshot was at 31 December. At that stage, we had just a little under half still in cash—around 46 per cent of the fund. Just over a quarter, perhaps almost 28 per cent, was in equities. We had 17 per cent invested in fixed interest or debt securities. The balance was spread between areas like property, infrastructure and private equity. It is a still a very defensively invested program. The return for the first half of the current financial year was minus 7.56 per cent. We will be providing another update as at the end of March.

Senator RYAN —When is that update expected to be released?

Mr Costello —It will be released before the end of April, so always within 30 days of the end of the quarter.

Senator RYAN —I have a couple of fairly basic questions. I am not sure if you are able to give me more current figures. If you can only refer me to the latest quarterly update, please feel free to say so. What is the current balance of the fund?

Mr Costello —Perhaps this a good chance for me to clarify some things. Quarterly updates are a good, regular program. It is a very fair question. The total balance as at 31 December was $59.6 billion. Our Telstra holding was $7.6 billion. The total balance of the fund excluding that Telstra holding was almost $52 billion—$51.97 billion.

Senator RYAN —The first half of the year had a 7.5 per cent decline. Given what has happened in the last seven or eight weeks, I am assuming that there has been a further decline.

Mr Costello —Sure.

Senator RYAN —Can you give me in round figures what that might have been to this point?

Mr Costello —The new year began positively but things have looked less bright as it has gone on and this month has been no different. So, as perhaps you would be aware, we have seen in the almost two months to date equity markets fall almost another 13 per cent. Our programs, which have an albeit relatively modest allocation to equities, will clearly be impacted by that. That gives some sense of the equity program. The rest of the program is performing positively, so we are really in a situation in which we are balancing the positive returns coming from our cash, debt and other securities against these continuously difficult circumstances that equity markets are facing. I reiterate: we have around a quarter of the fund invested in those broad equity markets, so it is certainly being impacted by that. This week alone has seen another four or five per cent reduction in equity market values around the world.

Senator RYAN —Is the roughly 27 per cent that is in equities—and that percentage will obviously change as equities go up and down, I would imagine—all Telstra?

Mr Costello —No. That excludes Telstra.

Senator RYAN —Sorry—I was not aware of that. Do you have an idea at the moment of how many Telstra shares you have and the current value of those? I obviously am not expecting you to know today’s numbers.

Mr Costello —Sure. There are two billion shares. I cannot give you a value as of today. It has been in the $3.40-odd range.

Senator RYAN —That is a nice round number. I can figure that out. Since you were last year, have you disposed of any Telstra shares? Do you expect that quarterly update to reflect any changes in that?

Mr Costello —Perhaps right about the time that we are here last time, these shares came out of escrow. That was on 20 November. I cannot quite recall the day that we were here, but it was certainly during November.

Senator RYAN —Yes, it was.

Mr Costello —Around that time, the escrow time ended. Since then, there has been no disposal of Telstra shares. There is great market interest in the Future Fund’s plans in this area and we have been very diligent in trying to manage those expectations in terms of our comments.

Senator RYAN —What percentage of Telstra does that represent?

Mr Costello —It is just under 17 per cent.

Senator RYAN —I am not sure how across this it is your responsibility to be, but what is the size of the total superannuation liability that the fund is expected to address? I understand that that also changes on a year-on-year basis.

Senator Sherry —That is an issue for the department. The Future Fund deal with the investments of the moneys that are to fund the liabilities, and the liabilities are the department’s side of the equation.

Senator RYAN —Thank you.

Ms Campbell —We will check to see whether we can get you the latest figure that was published on the unfunded liability. We will get that and come back to you.

Senator RYAN —What I was wondering was that given the changed—and this might be a question for either you or the department—investment environment, how long would you expect it to be before the Future Fund is able to fully meet these liabilities? Obviously, there have been some changes over the last few months in those timelines.

Ms Campbell —That issue relates to (1) the returns from the Future Fund and (2) the unfunded liability. The unfunded liability, as you said, does change over time. It is actuarially assessed on a regular basis. The government has just received a long-term cost report and will publish that in the next few months. That will detail the changes. The Future Fund legislation provided that funding could be drawn from the Future Fund when the fund either met the liability or at 2020. They were the two provisions that allowed money in the Future Fund to be accessed.

Senator RYAN —Last year in June the finance minister claimed that the funds would meet these liabilities by 2020. Is that still expected?

Ms Campbell —The long-term cost report has not been released yet. That will give us an opportunity to have a look at how big the unfunded liability is now, and also to have a look at the military schemes to determine theirs because their liability is also matched by the Future Fund, and also to look at the returns on the Future Fund. I am sure that the government will then make an assessment of whether that is still true.

Senator Sherry —One of the difficulties that I could just mention very quickly—and I understand that this has not changed—is that with the Future Fund you are dealing with a long-term investment return, and I understand that they have not changed, despite current market conditions, their long-term projection of the rate of return.

Senator RYAN —What is the projected long-term rate of return?

Mr Costello —The required rate of return under the investment guidelines issued by government is a minimum return of inflation plus 4½ per cent . It is a range really. The investment directions require the board to maximise the returns on the fund above a benchmark of inflation plus 4½ per cent to 5½ per cent.

Senator RYAN —When was the last time that the fund received a cash injection from the federal government?

Mr Costello —There has been nothing this financial year. Just before the end of the last financial year there was a further injection.

Senator Sherry —Finance can give you some figures on the injections of cash.

Ms Campbell —Cash was transferred on 25 June 2008—$3.9 billion.

Senator RYAN —Are any such transferred envisaged for the current financial year?

Ms Campbell —No.

Senator RYAN —After the practice of having regular cash injections at least since the Future Fund was set up, does this change require you to reconsider your investment strategy to achieve this rate of return that is required of you?

Mr Costello —No, our program remains clearly fixed on delivering this return on an annualised basis by 2020. Our strategy is evolving as market conditions evolve but it is not changing in response to any factors outside that in terms of expected funding or other issues. We are just clearly focusing on how we can manage these large cash reserves and trying to wind those down in a very focused way to ensure that we can deliver the type of returns that are expected from the fund over the long term.

Senator RYAN —At least at the moment in the debt market—with 17 per cent of a relatively significant amount of money—I imagine that you are a significant player. Have you seen, or can you explain, any effects that you are seeing as a result of the government’s AAA credit rating guarantee to the banks, on other people in the debt market—nonbank players in particular?

Mr Costello —Well we are avid students of market conditions and clearly credit markets have been through a series of changes over a period of time. Like all participants we observe changing dynamics and the role of government in that. We have noticed credit spreads widening while there is greater uncertainty and then coming back in when greater clarity was provided by government. In response to this calendar year’s events we are seeing some modest widening of those again. So we have no particular comment to make in relation to government policy in this area except that, like all other investors, we are trying to make sure that our allocations optimise the return for the risk that we are taking.

Senator RYAN —Do you, as one of the active players that you mentioned in the market, foresee any consequences from the re-emergence of the Commonwealth as a significant player in these debt markets, as it will presumably be issuing a lot more securities over the coming few years?

Mr Costello —Again, I think our interest in this is really limited to the assets available for purchase for a long-term investor. By and large, to generate the type of return that we are required to generate—inflation plus five being the mid point of the range—we are having to look, primarily, for areas outside of debt markets. That is certainly our focus now. We have a healthy exposure presently, combined with a substantial cash balance. Our focus right now is on assets outside of debt markets, where we are really starting to see a lot of very high quality assets which have been held by investors both locally and around the world starting to come on the market.

That is the focus on the Future Fund. That is where I think most of our future development will be, because debt markets alone, while they have been very productive for the fund over its first year or so, longer term will not be where we see the returns that we need to ultimately deliver on the government’s objectives.

Senator RYAN —Excuse me if this is a question that has been answered previously. Is the fund currently, or has it ever been, a significant holder of Commonwealth debt securities?

Mr Costello —No.

Senator RYAN —Does your investment mandate permit the purchase of future Commonwealth debt securities?

Mr Costello —Yes, in that it provides very few exclusions. So it would be a correct statement to say that Commonwealth securities would be able to be purchased by the Future Fund.

Senator RYAN —We have seen with the Updated Economic and Fiscal Outlook projected deficits—correct me if I am wrong—in the order of $30 billion over the estimates period, which is three years. It is possible, then, that those deficits could be funded by the Future Fund purchasing that Commonwealth debt in the market place.

Mr Costello —I think it is fair to say that that is a theoretically possible position.

Senator RYAN —If the Future Fund was to do that—I am just trying to clarify the rules around your investment mandate here—how would such a decision be made? You are an independent board.

Mr Costello —That is correct.

Senator RYAN —It would be made purely by yourselves.

Mr Costello —That is correct. All of our decisions are made purely in terms of our judgment about what combination of assets will help to deliver the return that the government is requiring. As you will appreciate, the board has been given the responsibility for the governance of the Future Fund so we work as a management team with the board. We are subject to their guidance and controls. So that decision would be made within the confines of the question: are these assets appropriate to help us achieve our objective, taking into account the risk and return guidelines of the government?

Senator RYAN —It would be fair to say that fair to say that Commonwealth Treasury securities and Commonwealth bonds—Aussie Bonds as they were called in the ads when I was a kid—would be a reasonably safe investment, on any sort of global standard.

Mr Costello —That is an absolutely correct statement.

Senator RYAN —So if the credit markets and the debt markets continued to be subjected to a degree of uncertainty—and I am looking forward at this $90-odd billion of deficit and the $118 billion that the Commonwealth has stated it plans to borrow over the next three years—it is possible that a significant proportion of that could be funded by the Future Fund wading into the debt markets and funding the Commonwealth deficits by buying securities.

Mr Costello —Despite—or perhaps because of—the high degee of security attached to these assets the return that investors might receive for it would make it unlikely that a material exposure would really assist the Future Fund in its objective of a real return of five per cent. There is a constant balancing between risk and return for us. We have a very long-term mandate and quite a challenging return target. So that really makes, as a general statement, riskier assets a fairly material part of our program over that long term.

Senator Sherry —The investment mandate, which was set by the former Treasurer Mr Costello, and finance minister Mr Minchin, is unchanged. The board is unchanged. The act is unchanged. All of the provisions that were set down by the former government have remained unchanged by the current government. There are no plans to alter that. Secondly, the ‘guardians’ as they are termed—the board—are broadly similar to a superannuation fund trustee in the private sector. They are arms-length to government.

There is a set of SIS requirements about diversification, prudent person and long-term investment. There is a somewhat similar arrangement here. Superannuation fund trustees would reasonably come to the conclusion that long-term investment in government bonds is not the place to be for a long-term return. The place to be for a long-term return is, broadly, equities and property, with a very low proportion in bonds and cash. The Future Fund is in a similar position to the trustees of a superannuation fund.

Senator RYAN —I appreciate that, Senator Sherry.

Senator Sherry —Unless there was a direction, and, as I said, the government has not changed any of the current arrangements in respect of the investment mandate. Nor has it changed any of the investment provisions of SIS in respect of superannuation trustees.

Senator PARRY —Can the minister do that?

Ms Campbell —To change the investment mandate the relevant ministers would need to write to the board of guardians. The board of guardians then have an opportunity to respond and that response and the change are then tabled in the parliament.

Senator RYAN —But there is a capacity for ministerial direction with this public tabling.

Mr Greenslade —Yes. There is a process by which the investment mandate is set. Should the government wish to change it, the responsible ministers—the Treasurer and the finance minister—would need to consult with the Future Fund board. Should there be disagreement, the Future Fund board’s response would be tabled in parliament.

Senator RYAN —I take your point, Senator Sherry: the act has not changed, the mandate has not changed and the board of board of guardians has not changed since the previous government set up the fund. The one thing that has changed is the substantial $100 billion plus of government debt that is going to be acquired, which was not done under the previous government. That is what I was trying to get to here. Excuse my ignorance, but is the cash that you have on hand at the moment literally cash held in deposit or is it some sort of cash security?

Mr Costello —No. It is mostly invested in Australian bank bills. For us that was a judgment, really, about relative risk and relative return. Quite some time ago we moved from an initial position of holding a lot of our cash on deposit with the Reserve Bank. As our program grew and our own team grew and our processes became more consolidated, we moved that to Australian bank bills.

Senator PARRY —What percentage is that?

Mr Costello —As at December it was just under half—46 per cent.

Senator RYAN —I am not asking for a hypothetical as to what may happen, other than to get a sense of your role under the act. If the government determined as a matter of policy that for whatever reason it was going to lower the hurdle of inflation from 4.5 per cent plus to a lower number, it could direct to you and you could respond in whichever way the board of guardians might see fit. We would all see that through parliament. But if that hurdle was lowered to 2½ per cent then presumably Australian government bonds would be a very easy way to meet a much lower hurdle.

Senator Sherry —That is a hypothetical. It is just as hypothetical as me saying—and I do not have the power to do it, to be honest—that to reassure superannuation fund members I would direct every private superannuation fund to put their moneys into bonds and cash.

Senator RYAN —But you cannot direct the board of superannuation trustees. The government can direct the board of guardians.

Senator Sherry —I can put forward amendments to change the SIS legislation.

Senator RYAN —That is very different, as we know, from a ministerial direction.

Senator Sherry —Sure. The current mechanism is the mechanism that your colleagues Mr Costello and Senator Minchin established.

Senator RYAN —I think they would be the first ones to respond that they forecast and delivered surpluses and regular cash injections, but I will move on.

Ms Campbell —Can I just clarify something, Senator Ryan. The Future Fund Act also puts a limit on responsible ministers giving directions. Section 18A(1) says:

(c)   allocate financial assets to:

(i)    a particular business entity; or

(ii)   a particular activity; or

(iii)  a particular business.

Senator RYAN —I was aware of part of that—that there cannot be a direction towards a particular investment. But, as I said, if the hurdle was lowered and your annual return target was one per cent, then, for an individual, bank deposits would be a good investment and so surely government bonds would be good for the fund. You lower the risk profile and you meet the investment target.

Mr Costello —I would concur with the statement. It is a theoretically correct statement.

Senator PARRY —But it is possible. Is that a nod? We cannot record nods on Hansard.

Senator Sherry —Just as it is possible for me to seek a change in the law to have every superannuation fund involved in bonds and cash. In the current climate that may have some appeal in terms of certainty, but I am damn certain that it would not be in the long-term interests of fund members—

Senator PARRY —But it is equally possible.

Senator Sherry —because we know it is bonds and cash. I have to say that in the current investment world and the current world financial markets, anything is possible, given what we have seen in the last year.

Senator PARRY —But you are in a position of influence.

Senator Sherry —The government has no plan, no intention, of changing the rules that you set down and the investment mandate that you set down in government.

Senator BOYCE —You have had a return of negative 4.1 per cent, I think it is, since the fund effectively got going, which unfortunately is a matter for some congratulations in the current period, but it is a long way off where you need to be to achieve the aim. What is being done there? I notice that you still seem to be selling down cash.

Mr Costello —That is correct. To respond to your comments, it is indeed an odd state of affairs that success is measured in degrees of capital loss. Certainly it gives our organisation no pleasure to have to report that so early in its life. Our position on that view is that, as these market conditions continue to deteriorate, forward-looking returns must inevitably be rising. So purchases made today start from a materially more attractive position in terms of future returns than those made yesterday and some time ago. This is really the challenge of our role. This opportunity represents, for the cash that we are using to purchase other assets, potentially some absolutely terrific buying opportunities.

Senator BOYCE —Are you talking about property and shares?

Mr Costello —We are talking property, shares and a whole range of things available that a long-term investor would hold. So our judgment primarily is trying to strike the right balance between time and where we are in the cycle and those increasingly attractive prices that are available to us against the risk—and there is always this risk—that we are just a little early in that process. As you can imagine, this exercise takes a great deal of time and discussion in our organisation.

Senator BOYCE —How would you describe the risk profile of your portfolio now, compared to what it was in July 2007?

Mr Costello —Because it contains less cash and, by definition, more assets where the market value can fall as well as rise, it is definitely invested in a more risky way that it was when we began. I think it is fair to say that that will continue to be the situation as we continue to roll out this program. What I would say to balance that is that the decisions made today, purchases made in this environment, we firmly believe, because of where they are starting from, will generate superior returns to those purchases made earlier on. So we are in the business of having to buy risky assets. We are trying to buy them at the very best price we can, which in this environment is all about at the very best time. But the only way we are going to generate a minimum return of inflation plus 4½ per cent is by buying well assets which do have this risk attached to them because they also have the commensurate return.

Senator BOYCE —I presume you are reviewing your strategies almost daily—at least quarterly, I would imagine.

Mr Costello —One of the things that this environment teaches investors is that it is worth keeping the discipline of a long-term program, which is always a challenge for investors—

Senator BOYCE —Holding your nerve.

Mr Costello —versus responding to conditions. The board has provided, from my perspective, great guidance here in terms of striking that balance between responding to material market signals but not jumping at things. A good indication of that is that we hold more debt securities than we expected to. So we took a decision back in 2008—

Senator BOYCE —You noticed this at the end of the financial year 2007-08?

Mr Costello —Basically, we started toward the end of the calendar year 2007—so not so long into the program. We materially reduced the amount of equities that we were setting out to buy relative to a more normal environment, and that turned out to be a good call for the Future Fund. When we saw the returns available to investors for buying debt securities, fixed interest securities, corporate bonds and others, we transferred a lot of our risk-taking from equities to debt securities. That has all turned out to be a good strategy for us. Investors were very well rewarded for it in that very difficult market. So a program has evolved materially through that time, as has the much slower than anticipated rate of transferring money from cash to other assets.

Senator BOYCE —Is that because of the difficulty in sourcing suitable investments? Why is it a slower rate than anticipated?

Mr Costello —Fundamentally because of our judgment that there was worse to come.

Senator BOYCE —Do you have a projected time for a break-even rate, for want of a better way of expressing it?

Mr Costello —I think this is where the too hard—

Ms Campbell —Senator, when you say ‘break-even’—

Senator BOYCE —When would you anticipate this fund to stop making a loss? Have you made projections about when you would expect that to happen? I know I am asking for crystal ball things, but that is the name of the game.

Mr Costello —I think the short answer is no. As I said, we continue to try and balance the security and the safety of cash against the opportunities that are presented. Certainly, we are—

Senator BOYCE —What would you see as an unacceptable rate of return, at which point, if you were another sort of fund, you might think about restructuring?

Mr Costello —We did talk about this at quite some length in our annual report, because the investment mandate set by the ministers requires us to try to maximise the return without taking excessive risk. So that clearly places an obligation on us to think carefully about what that means. Given the duration of the Future Fund and the fact that no assets are required until at least 2020 and then many years beyond, we do not think in terms of risk in single-year outcomes. We think that time is too short in which to try and run a program to minimise unattractive outcomes.

Senator BOYCE —But, if you were starting to fall to negative 20 per cent in four or five years, for example, to get to where you would need to be by 2020 becomes much more difficult.

Mr Costello —It clearly does. It is absolutely fair to say that, once you are negative, you have to run twice as fast to get back to where you started. I would perhaps try and respond to that by saying that, as an organisation, as a board and as a management team, despite the challenges of this environment and the acute difficulty of trying to strike the right balance between too early and too late, we remain strongly of the view that the Future Fund will come through this in a very strong way, that it will deliver to government over periods of time, that the government can have confidence in our organisation for these returns and that we are in the very fortunate position in a global marketplace of being able to acquire very high quality assets at very competitive prices that will deliver very attractive rates of return. When we are thinking about the long-term return, we do focus on returns over a few years. So we are very conscious of the risk that we are taking and we are trying to understand that risk in terms of how it would play out over a two- to three-year period. That is our way of thinking about excessive risk—a program which carries just so much risk that there is a return over a few years—

Senator BOYCE —So there is no figure on it?

Mr Costello —Perhaps if I could just clarify the question: no figure on?

Senator BOYCE —What I am asking here is: is there a figure at which point you would hit the panic button? Let us say you got to negative 11 per cent over the next financial year or so. I am just being theoretical.

Mr Costello —There is no figure and, hopefully, we will never have to hit the panic button.

Senator BOYCE —I can appreciate that. No-one would like to hit it. Mr Costello, I was interested in your saying that the Future Fund can invest in pretty much anything it likes. You would be aware that your chairman, David Murray, in October last year, I think, suggested that the government should buy into some of the investment funds that had had their assets frozen following on from the bank guarantee. Are you aware of that?

Mr Costello —Not that specific comment. I know that Mr Murray has made a number of comments.

Senator BOYCE —Mr Murray is quoted in the World Today program as saying that the federal government should consider buying into the mortgage and cash management funds that had had their assets frozen. The government clearly did not do so. Did the Future Fund do that?

Mr Costello —What I can say in terms of the Future Fund program—and I know that when Mr Murray speaks he always chooses to make it very clear whether he is speaking in his capacity as chairman of the Future fund or as a commentator—is that it did invest in mortgaged backed securities during the early part of this cycle. Again, it is a very good example of where an investor like the Future Fund was able to pick the absolute cream of the market—

Senator BOYCE —So you did invest in some of those frozen funds?

Mr Costello —I think the frozen fund thing is difficult. You gave the example of mortgaged backed securities—

Senator BOYCE —Yes.

Mr Costello —The Future Fund does hold mortgaged backed securities.

Senator Sherry —Mr Murray is frequently in the media talking about investment and economic issues. As Mr Costello has indicated, if Mr Murray is speaking in respect of his position in the Future Fund, he does make it clear publicly. For example, Mr Murray has had a role in putting together a special investment vehicle for the motor vehicle industry for credit. That clearly had nothing to do with the Future Fund.

Senator BOYCE —However, this article, which he may have sought to correct—I do not know—is from the World Today and it is obvious that his quotes are used. At the end of the interview, Eleanor Hall said ‘The Chairman of the Future Fund David Murray’. There is nothing in the interview to indicate that he had sought to speak in a private capacity. In any case, I would have thought his views about this subject would not particularly alter whether he was speaking as the chairman of the fund or as an individual business person.

Senator Sherry —No doubt that was the calculated risk that the former government took when they appointed him. When the former government appointed him, presumably they would have seen the potential of journalists and the public at times becoming unable to distinguish between Mr Murray, the chairman of the Future Fund, and Mr Murray speaking in another capacity about another issue at another time, as I know Mr Murray has done very, very frequently over many, many years.

Senator BOYCE —The date of this article is 28 October 2008. Minister, you were telling us earlier that you had done nothing to change the framework around the Future Fund. Is that a good thing or a bad thing? I am not sure that I understand what you are trying to say here.

Senator Sherry —I am just saying that I am sure the former government would have considered the issue around Mr Murray speaking in his position as chair of the Future Fund and him speaking from time to time about other issues to do with the economy and that being attributed, fairly or unfairly, to that role and also it being noted that he was the chair of the Future Fund.

Senator BOYCE —Nevertheless, these comments were not made while the former government was in power. They were made well after your government came into power. I would have thought that, if there is a conflict with these comments, it is between what your government is doing and the view of a very senior and independent investment person in the form of David Murray. I was asking the fund whether they had followed this advice and invested in the investment funds to free up liquidity.

Mr Costello —With that question put more clearly, I need to distinguish between the Future Fund’s investment program, which was an investor in mortgaged backed securities in the wholesale market and, in the light of that article, the suggestion concerning these funds which suffered liquidity problems. We have not participated in that market. As you indicated in that article, we have not been an investor in frozen or locked-up funds.

Senator BOYCE —So on the same basis then, no investments that were held by the Future Fund would have been frozen?

Mr Costello —No.

Senator BOYCE —Okay. Thanks. That is the end of my questions.

Senator PARRY —I think I will be wrapping up for the coalition on this section. I just have a couple of questions.

CHAIR —Then will we need to bring forward the Department of Human Services?

Senator PARRY —Yes, we are ready to go. We have got our shadow minister here, and I will be about two or three minutes. So you can alert them.

CHAIR —Okay. We will advise them. And can I just take this opportunity to put on the record that we have sought information from committee members, and CRS Australia will not be needed so we have allowed them to go home and enjoy their evenings. Senator Parry.

Senator PARRY —I just want to go back to the two billion shares that were held in escrow. When did that expire?

Mr Costello —20 November.

Senator PARRY —I realise this would be market sensitive so I have to be careful how I ask the questions, and how you answer the questions. Obviously, the government is not going to get rid of the whole two billion shares in Telstra overnight—or the fund is not going to do that. Do you have a forward-looking plan to either increase or maintain the holding in the Telstra market?

Senator Sherry —It is the fund, sorry, not the government—

Senator PARRY —Yes, sorry, the fund. I beg your pardon. That is correct.

Mr Costello —There is certainly no plan to increase—and in fact one of the very, very few restrictions that the investment directions do place on the board is not to acquire additional Telstra shares.

Senator PARRY —That’s one for the books!

Mr Costello —Notwithstanding that, I think it is fair to say that we would have no plan to increase the position. What I can say is that as a major shareholder we do have to be very careful of our position there. With the securities coming out of escrow, this issue is clearly now exercising more of the organisation’s time. We watch company events closely and we recognise our role as a significant part-owner of the company. I would make very little comment apart from that, except to say that this is a very material part of the portfolio; it is moved from being in escrow to being part of the program that we have—

Senator PARRY —Fully tradable, yes.

Mr Costello —Control over. As a result, it is certainly a significant part of the discussions in the organisation and our planning going forward.

Senator PARRY —Just as a matter of interest, we were talking earlier about the price. It closed at $3.76, so two billion shares represent a fairly huge slice of the investment fund. Minister, you gave an indication that you do not have any intention to change the investment mandate, that is, in the way in which you would approach the earnings from the fund. How difficult—

Senator Sherry —No, the investments of the fund.

Senator PARRY —Pardon?

Senator Sherry —It is the investments of the fund. I think you said ‘earnings’.

Senator PARRY —That is a good point. So the original investment, figure X, remains under the original enactment—

Senator Sherry —Yes.

Senator PARRY —and so you can do what you wish with all the earnings—

Senator Sherry —No.

Senator PARRY —It is not subject to the investment mandate?

Ms Campbell —The earnings are reinvested in the fund, Senator.

Senator PARRY —And once they are reinvested, are they subject to the investment mandate?

Ms Campbell —They are, yes.

Senator PARRY —So if you did not reinvest them—or is that part of the investment mandate that the earnings have to be reinvested?

Ms Campbell —It was part of the legislation that the earnings would be reinvested.

Senator PARRY —Okay. So I do not understand the clarification then, Minister, because the entire investment—

Senator Sherry —No, you said ‘earnings’ and I said ‘investment’. So we are both right.

Senator PARRY —Okay. I will accept that. So investment and earnings are subject to the investment mandate. The 4.5 per cent or thereabouts above inflation—is that the average of capital cities? How is the national inflation rate determined—CPI?

Mr Greenslade —It is the published CPI.

Senator PARRY —Okay. Does the investment board face any penalty or issue if you do not meet the 4.5 per cent plus CPI?

Ms Campbell —Senator, the investment mandate is given, the board reports regularly and ministers, clearly, read the reports.

Senator PARRY —Obviously, you are not meeting it, so you are not expected to meet it—

Senator Sherry —But it is long term; it is not this year, it is not last year, it is not in three years time. It is a long-term—

Senator PARRY —So what is the date that someone says you have or you have not met your investment mandate criteria?

Ms Campbell —The long term was considered to be five to 10 years.

Senator PARRY —Is it five or is it 10?

Mr Greenslade —Broadly, the board is seeking to assess its performance and its role in 10-year periods, but the shorter term indicator is to look at performance over five years.

Senator PARRY —My colleague Senator Boyce went through a number of issues about your investment strategy. I am trying to ascertain what compels the board to do the best it possibly can for the return of the investment. Perhaps you can answer it in that way or perhaps I need to drill down further. Can you give me a broad answer to that question?

Mr Costello —Perhaps I could respond to the question you were asking about time frames and any impact. The mandate talks about delivering this return over the long term. Clearly, as an organisation, just as we had to crystallise our thinking around what excessive risk would be so we had to think about what the long term meant. When we structure the portfolio we think about delivering this over rolling 10-year periods. We recognise, however, that that is a long time for all people to wait to see the efficiency of the organisation. On the other hand, we would argue that every single year is way too often and is not a useful indicator for a long-term mandate. So the position that we are publicly putting has now become fairly well established, and that is that we are structuring the portfolio to deliver these real returns over rolling 10-year periods. We think that rolling five-year periods gives all commentators and all observers and all stakeholders a very good indication of progress on that. In terms of your question about what happens if we do not-

Senator PARRY —Can I just supplement that question by saying we do not want the board putting up their hands and saying, ‘It’s been too hard.’ In the global economic downturn investment return is very poor. There must be a measure and there must be some accountability that you have to abide by to ensure that we get the best return on our investment.

Ms Campbell —The government considers the long-term nature of the target to provide that. The government is also aware of the exceptional circumstances at the moment, and I think Mr Murray has been in the press recently saying that he believes that, in the long term, the board can achieve those things.

Senator PARRY —So this all comes down to long-term strategy and, if there are some short-term—hopefully not medium-term—losses, that is just put down to economic circumstances, not board inefficiency. How do we ascertain investment strategy versus global economic conditions?

Senator Sherry —If you look at the quality of the board members and their background, it is very, very good. You look at the quality of the staff and their experience in other areas including—

Senator PARRY —I am not casting aspersions on anyone. I just want to know what the measure will be.

Senator Sherry —You appoint a very good, knowledgeable team with a correct vision and correct investment qualifications and background. Perhaps to explain: in terms of superannuation, which has had a lot of focus including yesterday on the current negative rates of return, Treasury said that for a variety of reasons the long-term rate of return in the superannuation system in Australia 20 years ago was around five per cent. I can recall five or six years ago—even two years ago—people were saying, ‘That is too low. It should be higher,’ because at that time the long-term rate of return was about seven per cent. Now, five per cent looks about accurate. So just as Treasury officials used their expertise all those years ago to set what seems to be a good long-term rate of return in good times as well as not so good, which we are going through at the moment, the long-term rate of return, benchmarked as the Future Fund, the guardians and the staff have set—and I asked many questions about this when I was in your position and sitting there—certainly seems to be on all long-term judgments and skills to be reasonable.

Senator PARRY —All right, I will accept that, Minister. I will place my final question on notice, if there is anything to provide on notice. If there are any accountability measures, that gives us comfort that the board is accountable to some degree for correct investment strategy especially now that we have the non-escrow shares in Telstra which can be sold on the market and funds invested in any other strategy or other form. So I am sure that the committee would appreciate any information on accountability measures you wish to provide, and I am happy to take it on notice.

Ms Campbell —Chair, may I provide an answer to Senator Ryan, which I promised earlier tonight, about the size of the superannuation liability?

CHAIR —Yes.

Ms Campbell —The superannuation liability as at 31 December was $101.9 billion.

Mr Costello —I have one final comment. It may seem self-serving, but I think it is important to place on the record that there is a huge amount of personal and collective focus, pride and ownership of this issue. I appreciate that perhaps that does not provide you with what you are looking for. We are a very accountable organisation. Our activities are widely observed and commented upon, and we are compared with others. We are very focused on delivering this aim and, accountability issues notwithstanding, it is intensely personally felt by all the people associated with the entity.

Senator PARRY —Thank you, that is somewhat assuring.

CHAIR —I thank the officers and the minister.

Proceedings suspended from 8.21 pm to 8.29 pm