What are the ‘hidden dangers’ of Trad’s plan to use super fund surplus?

Posted on January 9, 2020 by Pete Faulkner - Uncategorized

A story in today’s Australian talks about the ‘hidden dangers’ seen in the Queensland Treasurer’s plan to utilise $5bn of the public service Defined Benefit superannaution fund surplus to set up a Queensland Future Fund to pay down the state’s debt in the future ($3bn is a new withdrawl while the other $2bn is reallocated funds from a previous repatriation to pay down debt which will now be shifted). The Defined Benefit Fund currently sits with assets of approximately $34bn and a surplus of assets over benefits of $7.3bn.

The story quotes our friend Gene Tunny from Adept Economics who says he doesn’t want to ‘catastrophise about‘ the proposal but believes that it is ‘risky‘ given the fact that a report by the State Actuary has found that, based on some variable investment and inflation assumptions, there would be a 53% chance that the Defined Benefit Fund would move into deficit in 2023 if the full $3bn were to be repatriated now.

However, we should note that proposed legislation would require the State to fully fund the Defined Benefit superannuation fund (the only such fully-funded super fund among the States) and therefore any such future deficit would require the government to provide funds from elsewhere.

Given that the supernnaution fund is managed by Queensland Investment Corporation and that the same manager will be running the proposed Future Fund it seems to me that there is a question that requires answering before we can talk about any ‘hidden dangers’. As Gene, in another piece in The Australian last month (see here) accurately noted “It’s a political solution, not an economic solution. Treasury’s just taking money they already had and putting it in a different jar, managed by the same fund manager..”. This is very different to the Defined Benefit fund being raided to support the operational budget. So…..

What different investment decisions are likely to be made for these funds in a Future Fund rather than for the same funds if they remained in the super fund? Given that any deficit in the super fund has to be met, then the only difference that will accrue to the State’s finances overall will be if the funds in the Future Fund out/underperform what would have happened to the surplus funds had they been left in the super fund.

Much is also being made of the 53% chance of the super fund moving into deficit if the surplus is reduced by an additional $3bn. However, the report itself (available here) notes that there is also a 30% chance of the fund moving into deficit, under these assumptions, even without any surplus being repatriated (which of course implies a 70% chance that it will remain in surplus). As the State Actuary himself makes clear, ‘no guarantee can be provided as to future funding levels due to the variability of scheme outcomes, particularly investment returns. It is important to note that the risks of fund deficiency fall upon the State, with the legislative guarantee protecting member entitlements and so the effects of a deficit on the security of members’ entitlements are insignificant compared to similar funds in the private sector.’ A focus on the 53% chance, without acknowledging the 30% chance in the no-repatriation scenario, appears pointless and deliberately sensationalist.

I share Gene’s concern that this move is political, rather than economic, which is likely to make no difference to Queensland’s finances in the long-term. However, unlike The Australian, I am not convinced that there are a great deal of ‘hidden dangers’ with this approach. If there is a risk it would seem to me that it comes from the fact that this shifting of assets from one bucket to another could lead to a false sense, both within the Government and outside, that something has been done to address the State’s high debt levels when in fact this likely achieves nothing.