Australia Treasury Says No to Sovereign Wealth Fund

Australian Treasury Secretary Martin Parkinson has voiced disapproval of a sovereign wealth fund for the country following strong support for such a fund from resource-rich Western Australia.

(March 7, 2012) — Australian Treasury Secretary Martin Parkinson has dismissed calls for a sovereign wealth fund.

“An SWF does not constitute a contribution to future fiscal sustainability,” Parkinson said, according to the Dow Jones Newswires, adding that the Treasury continued “to observe that the creation of an SWF per se does nothing to address either Australia’s net debt position or, more broadly, the level of government or national savings over time”.

Parkinson’s dismissal of a sovereign wealth fund for the country stands in contrast to views voiced last month by Western Australia’s Premier Colin Barnett, who expressed plans to form a sovereign-wealth fund to better harness the region’s natural resources. Barnett said that the investment vehicle would be comparable to the existing AUS$73.07 billion (US$78 billion) Future Fund set up by the Commonwealth government in Canberra. “Despite the fact that Western Australia is clearly the powerhouse driving the nation’s economy—we have the highest forecast growth in the country—rising state debt is the constraint on our economic growth,” Barnett told the WSJ.

Barnett’s plan, however, has been met with continued resistance, not only from Parkinson, but also from Australia’s Prime Minister Julia Gillard, who has asserted that the country’s superannuation stands in the place of a sovereign wealth fund, saying that the superannuation system is already a trillion-dollar sovereign wealth fund–but with market benefits. “That’s because it’s privately managed by thousands of trustees, instead of a sovereign wealth fund managed centrally by a Canberra-appointed manager,” she said last year.

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Australia is faced with the question of what to do with the proceeds of a large surge in demand for its vast deposits of coal and iron ore. At the heart of the dispute is whether Australia should try to emulate Norway by establishing a sovereign wealth fund or rather impose a tax on mining profits as the best way of capitalizing on the boom. In 2010, the International Monetary Fund (IMF) urged Australia to create a sovereign wealth fund to protect the country against a possible Asian market bubble. IMF director Anoop Singh said at the time that the revenue from the current resources boom should be saved “to ensure a more equal distribution of its benefits across generations and reduce long-term fiscal vulnerabilities from an aging population and rising health care costs.”

(March 7, 2012) — The largest public pension in the United States may slash its assumed rate of return on assets to 7.25% from 7.75%, as recommended by Alan Milligan, California Public Employees’ Retirement System (CalPERS) Chief Actuary.

An agenda item released by the fund on the revised discount rate stated the following:

“In order to keep economic assumptions current, it is essential to review actuarial assumptions periodically. The price inflation assumption is currently 3% and this assumption was last reviewed in 2004. The real wage inflation assumption is currently .25% above price inflation (3.25%) and was last reviewed in 1998. The real discount rate assumption was last reviewed in March 2011 and is currently 4.75% above inflation (7.75%).”

Milligan’s recommendation will proceed to CalPERS’ board, which will vote on whether or not to accept the proposal.

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Last month, in an interview with the Public Retirement Journal, Milligan told the Journal that he hadn’t seen anything in the current environment that would cause him to recommend a drop of more than 0.25% in the discount rate — the same recommendation he gave last year. Milligan is responsible for developing CalPERS actuarial policies, overseeing actuarial staff and operations, and advising the CalPERS Board of Directors. He also serves as Chair of the California Actuarial Advisory Panel, the independent body created to provide information on pensions, OPEBs, and best practices to the Legislature, Governor, and local agencies, the fund outlined in a release.

CalPERS is not the only scheme to face resistance and concerns over its projected returns.

In January, Robert North, New York’s chief actuary, recommended that the city’s schemes lower its assumed annual rate of return on assets to 7% from 8%.

Meanwhile, New York State’s pension system lowered its rate from 8% to 7.5% in 2010; the Illinois State Employees’ Retirement System made a similar cut, from 8.5% to 7.75%. In September of last year, Joe Dear, the investment chief of CalPERS, expressed that a 7.75% return may be tough to meet. In an interview with aiCIO featured in its Summer Issue, Dear commented on the fund’s stellar returns, lowering expectations of future similarly stellar performance by saying: “Honestly, and not taking anything away from the team here, our 20.7% returns in fiscal 2011 were largely the result of market beta. Public equities are about half our $234 billion portfolio, and it is no secret that public equities significantly increased in value over the past year.”

Summarizing his perspective on CalPERS’ 2011 investment return and his future outlook, Dear told aiCIO: “Obviously, a 20% return undermines the statements of public pension fund critics—that we are unable to reach our target. I think that’s important—that there is still a lot of earning power in these assets—but let’s be clear: There won’t be a string of 20% years in a row.”