Liquidating Future Fund would cost $200bn: WTW

Independent modelling commissioned by the Future Fund (FF), in response to recent calls for liquidating the fund, has revealed a median cost or lost value-add of around $200 billion to taxpayers over a decade. 

In August, Dimitri Burshtein from think tank the Centre for Independent Studies advocated the “economically responsible action” of liquidating the FF to pay down current $895 billion government debt, which is projected to reach some $923 billion at the end of the 2024 financial year according to the most recent Commonwealth budget forecast.

He noted the fund is the 10th-largest Commonwealth expense by function, with an opportunity cost of maintaining it at some $10 billion per year, which is the interest paid on $250 billion of extra government debt at the current cash rate.

“There may have been a case for the Future Fund when the Commonwealth’s debt position was net negative. It may possibly have been the case for the Future Fund when interest rates were near zero,” Burshtein said.

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“But neither of those conditions hold any longer or are likely to reverse in the near to medium term. Meanwhile the opportunity cost of the debt is borne by the budget and the benefits accrue to the funds.”

In response, Future Fund commissioned independent modelling from Willis Towers Watson (WTW) that assessed the impact of winding down the fund versus maintaining its current investment program over a 10-year horizon. 

It simulated future values of key variables, such as value of current debt and the value of current fund assets, to illustrate the potential range of ‘value-added’ outcomes by maintaining the Future Fund (FF) and presented risk and return modelling of the FF portfolio as at 30 June 2023.

Assumptions included no additional withdrawals are paid from the Future Fund over the 10-year period, the median annualised return on the assets is estimated to be 9.4 per cent per annum, and the current asset allocation is retained for the duration. It also assumed a discount of around 5 per cent to total net assets given the likely discount required to sell the fund’s illiquid assets.

The projection of value-add to the government in maintaining the fund could reach as high as $500 billion, the modelling found.

“Our analysis suggests that under a scenario whereby the Future Fund is liquidated to pay down government debt, this would come at a median cost (i.e. lost value-add) of around $200 billion over a decade with plausible outcomes around this ranging from approximately break-even at the fifth percentile to a cost of up to $500 billion at the 95th percentile,” WTW said.

“The expected value-add of retaining the FF relative to the alternative scenario of liquidating the FF’s assets and retiring the equivalent amount of government debt increases gradually over the projection period as the FF’s assets are expected to outperform the cost of government debt on average in any given year.”

Its modelling suggested the expected (median) value-add is around $200 billion at the end of the 10-year projection.

Outlining its observations, WTW continued: “Asset class returns and market rates are variable and subject to considerable uncertainty, and so it is important to consider the likely range of plausible outcomes for value-add. 

“Our analysis suggests that there is only around one in 20 likelihood that maintaining the FF will not deliver any material benefit (or cost) if maintained over the next 10 years.”