We, PETER HOWARD COSTELLO, Treasurer, and NICHOLAS HUGH MINCHIN, Minister for Finance and Administration, give these Directions under subsection 18(1) of the Future Fund Act 2006.

Dated               3 May 2006

PETER HOWARD COSTELLO                     NICHOLAS HUGH MINCHIN

Treasurer                                                          Minister for Finance and Administration

Contents

Part 1      Preliminary.. 3

Part 2      Directions.. 4

Part 1      Preliminary

1.             Name of Directions

These Directions are the Future Fund Investment Mandate Directions 2006.

2.             Commencement

These Directions commence on 22 May 2006.

3.             Definitions

In these Directions:

Act means the Future Fund Act 2006.

Fund means the Future Fund.

Board means the Future Fund Board of Guardians.

4.             Objective of these Directions

The Future Fund will make provision for unfunded superannuation liabilities that will become payable during a period when an ageing population is likely to place significant pressure on the Commonwealth’s finances. 

The objective of these directions is to give guidance to the Board in relation to its investment strategy for the Future Fund.  The Future Fund Board of Guardians is required under section 18 of the Act to seek to maximise the return earned on the Fund over the long term, consistent with international best practice for institutional investment and subject to its obligations under the Act and any directions given by the responsible Ministers under subsection 18(1) or subclause 8(1) of Schedule 1 of the Act.

These Directions are given under subsection 18(1) of the Act to articulate the Government’s expectations for how the Fund will be invested and managed by the Board.

Investments by the Future Fund will be confined to financial assets. 

Part 2      Directions

5.             Benchmark return

The Board is to adopt an average return of at least the Consumer Price Index (CPI) + 4.5 to + 5.5 per cent per annum over the long term as the benchmark return on the Fund. 

During the initial transition period, as the Board develops a long-term strategic asset allocation, a return lower than the benchmark return is expected. 

In targeting the benchmark return, the Board must determine an acceptable but not excessive level of risk for the Fund measured in terms such as the probability of losses in a particular year.

6.             Limits for holdings of listed companies

The Board must establish a limit for holdings on any listed company in order to prevent a breach of the statutory limits imposed by sections 21 and 22 of the Act.

7.             Telstra Corporation

The Board must not acquire a direct equity holding of voting shares in Telstra Corporation Limited except as a result of a transfer of financial assets by the responsible Ministers under clause 6 of Schedule 1 of the Act or a gift of financial assets under clause 7 of Schedule 1 of the Act.

8.             Board must consider impacts from its investment strategy

In undertaking its investment activities, the Board must act in a way that:

(a)    minimises the potential to effect any abnormal change in the volatility or efficient operation of Australian financial markets; and

(b)   is unlikely to cause any diminution of the Australian Government’s reputation in Australian and international financial markets.

9.             Corporate Governance

The Board must have regard to international best practice for institutional investment in determining its approach to corporate governance principles, including in relation to its voting policy.