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Page 12 Senate Monday, 27 February 2017 when the balance of the fund was sufficient to offset the present value of the unfunded superannuation liabilities of the government. That was, in this case, on our assumptions, 2024-25. So they were the two broad scenarios. Senator McALLISTER: The government, as I understand it, is yet to make a decision about when it will commence drawing down. Could you just talk a little bit about the costs and benefits of pursuing either strategy? I am going to ask you shortly, too, about some of the variables that impact on the analysis. Just thinking about the choice that is before us, what are the costs and benefits of pursuing each strategy? Mr Bowen: On the assumptions that we used in our analysis, the key difference is that the later drawdown scenario results in a significantly higher net financial worth for the Commonwealth than the immediate drawdown. Under the immediate drawdown, the Future Fund would be exhausted well before the superannuation liability is finished. Under the later drawdown, essentially you are matching a long-term liability with a long-term asset. Our conclusion, or our findings, hold provided the Future Fund investment returns exceed the government's bond rate—so, its cost of borrowings. To date, of course, the Future Fund has well and truly exceeded the cost of government borrowings. Whether that would be the case in the future, well, we cannot say absolutely. But it is difficult to see that a fund such as the Future Fund could not earn at least, if not more than, the long-term bond rate. Senator McALLISTER: You modelled the consequences of the return dropping to, say, CPI plus four per cent. That is a scenario that has been contemplated by the Future Fund in evidence, I think, before this committee previously. Mr Bowen: That may be the case. I am not sure. If I could make one point— Senator WONG: Who did the report? Mr Bowen: It was a PBO report. Tim Pyne can talk in a minute. I want to make one point. Senator WONG: That would be useful, thank you. We would not mind going beyond what has actually been tabled. Mr Bowen: If I can remember my point I will make it. In our analysis we did choose to do a sensitivity analysis on a lower rate of return. What you have to remember too is, if the return on equities is lower in the future—and that is possible—it is highly likely that the return on cash will also be lower and hence there will still be a differential between cash or bond rate and equity return. I am very happy for Mr Pyne to talk in more detail. Senator McALLISTER: Mr Pyne, is there anything that you would like to add? I have read the report, I understand that you held the long-term cost of borrowing stable even while you reduced the return, and Mr Bowen observes that this is actually an unlikely scenario in some ways. What is the impact, though, of having the spread between the cost of borrowing and the returns to the fund narrow in this way? Mr Pyne: In modelling the scenarios, which we included in the report, one of the key things to note is that we used a long-term cost-of-borrowing assumption that was consistent with the medium-term projections that are included in the budget papers and also consistent with the Intergenerational report. We were not attempting to make an individual judgement about the long-term cost of borrowing. In terms of our assumptions around the Future Fund we were choosing an investment return that we thought was consistent with that long-term cost of borrowing, so that broadly represented a margin that 1½ per cent annually over the borrowing cost. In doing our sensitivity analysis, as Mr Bowen pointed out, we were not doing a sensitivity analysis on what would be the case if there were changes in interest rates and equity returns over the whole of the economy, which at times has been some of the public discussion. We were really doing a sensitivity analysis on the investment management performance of the Future Fund. We were still holding those interest rates constant but looking at what would be the case if the Future Fund only slightly exceeded the cost of borrowing. Senator WONG: I am not across all of the detail of this in the way that Senator McAllister is, but essentially one of the scenarios, or your central scenario, assumes a return which is at the midpoint of the mandated target return—correct?— Mr Pyne: Yes, that is right. Senator WONG: which is less than what is assumed in the budget. The budget assumes a five per cent gross real return. Is that not right? Have I misread this? Mr Pyne: I think our assumption is broadly consistent with what is in the budget. Senator McALLISTER: Although in the sensitivity analysis you pull the estimated return down lower, and the key findings. If you said to meet the unfunded superannuation liabilities, you have to wait longer before you start drawing down on the fund— FINANCE AND PUBLIC ADMINISTRATION LEGISLATION COMMITTEE
Monday, 27 February 2017 Senate Page 13 Mr Pyne: That is right. Senator McALLISTER: under that scenario. Senator WONG: I noticed Mr Costello has publicly expressed concerns about the return target. Are you familiar with that, Mr Bowen? Have you seen those comments? Mr Pyne: Yes. Senator WONG: He has also said publicly that the fund had raised its concerns with the government. Are you aware of the content of those discussions? Mr Pyne: No, Senator. Senator WONG: Have any of your discussions contemplated, or do you have a view about, how realistic the current return target, as budgeted for, is? Mr Pyne: No, I do not have a view. Senator McALLISTER: I want to ask about a different report—the report you have released on unlegislated measures. That came out in February 2017. The report has unlegislated budget improvements of $8.5 billion over the forward estimates. Is that different from the number in MYEFO? Mr Bowen: This is based on MYEFO. But it depends on your definition of 'an unlegislated measure'. Senator McALLISTER: I think that is what we are trying to sort out. We get MYEFO and then we get your report. We are just trying to understand what the factors are in each of those. Mr Bowen: I know— Senator WONG: Why is your costing different from some of the public statements from the government? We just want to understand what they are including that you are not, or vice versa. Mr Bowen: Let me tell you what we are including, or what we are not including. We are not including measures that are yet to be legislated but have not yet been introduced into the parliament. Putting it the other way: our measures are measures which are carried forward from previous budgets and which have been introduced but remain unlegislated. I know there has been a figure in the public domain of $13 billion. Our figure is eight point something. As I understand it, the difference represents measures that have not yet been introduced. I think that is correct? Mr Pyne: I think so. Mr Bowen: That is our understanding. Senator McALLISTER: Amongst other things, then, your February report would not include the omnibus bill that was recently announced and introduced? Mr Bowen: Tim, would you like to comment on that? Mr Pyne: A number of the measures in our list are outstanding ones which—I think they would be included? Mr Bowen: I have a list. Senator McALLISTER: Can you table that? Senator WONG: We are pressed for time. Is it possible that that be tabled? Mr Bowen: I was not going to read it all out, but just let me see if I can give you this. I do not see any reason we cannot. It highlights those which are in the omnibus bill. There are a large proportion, but there are others that are not. We will just copy the table for you. CHAIR: I thank the Parliamentary Budget Office. Department of Parliamentary Services [10:04] CHAIR: I welcome Mr Rob Stefanic, Secretary of the Department of Parliamentary Services; Dr Dianne Heriot, the Parliamentary Librarian; and officers of the department. I thank the department for providing information in advance of these hearings in response to the recommendations in the committee's final report on its inquiry into the Department of Parliamentary Services, which was tabled in the previous parliament. The information provided has been circulated to the committee. Mr Stefanic, do you have an opening statement? Mr Stefanic: No, I do not, Chair. CHAIR: Dr Heriot, do you have an opening statement? FINANCE AND PUBLIC ADMINISTRATION LEGISLATION COMMITTEE
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