Australia Invests in Tobacco Firms to Pay Lawmakers Pensions

Australia, which is introducing some of the toughest anti-smoking laws in the world, invested A$147.7 million ($148.2 million) in shares of tobacco companies including British American Tobacco Plc (BATS) to pay for politicians’ retirement.

The government’s Future Fund -- established in 2006 to cover pension costs of retiring lawmakers, judges and public servants -- held stakes in 14 tobacco companies as of Dec. 31, 2010. The portfolio holdings in manufacturers of tobacco and cigarette producers were obtained by Bloomberg News through an Australian Freedom of Information Act request.

Australia raised tobacco taxes by 25 percent last year and says it will become the first nation to ban brand names on cigarette packaging to deter smokers. Former Prime Minister Kevin Rudd last April pledged the government would spend A$85 million on an anti-smoking advertising campaign as he said “cigarettes are not cool.”

“It seems incongruous that the government is investing in companies that will not prosper, and this should be stopped,” Steve Hambleton, vice president of the Australian Medical Association said in a telephone interview. “It doesn’t make sense when the government has launched the strongest anti- smoking measures in the world.”

Financial Objective

The Future Fund’s holdings as of Dec. 31 include A$46.4 million in London-based British American Tobacco, A$36.5 million in New York-based Philip Morris International Inc. (PM) and A$26.1 million in Lorillard Inc. (LO) The details were contained in a document received from the Future Fund on March 10 after a freedom of information request by Bloomberg News. Its investment in tobacco companies represents 0.5 percent of its holdings in equities.

“The Future Fund board’s mandate doesn’t direct it in relation to investing in particular industries or activities, but does set a clear financial return objective,” the Melbourne-based fund said in a statement e-mailed to Bloomberg today. “The board has long made clear that it expected to consider investment in a large number of entities across a wide variety of activities, provided those activities are legal in Australia.”

The fund was established as a statutory authority under the Future Fund Act of 2006 by the previous administration of Prime Minister John Howard. It has its own board, while oversight is provided by the Treasurer and Minister for Finance and Deregulation, according to its website.

‘Smoking Kills’

“Consistent with the governance arrangements put in place by the former government, the Future Fund takes its investment decisions at arms length of the government,” the office of Treasurer Wayne Swan said in an e-mailed statement today.

A spokeswoman for British American, Louise Warburton, said the company would not make any comment.

About 15,000 people die each year from tobacco-related diseases in Australia, where sales of tobacco products totaled A$10.9 billion in 2009, according to government statistics. Smoking is the largest single preventable cause of death, the Medical Association says. Health Minister Nicola Roxon says smoking cost the A$1.3 trillion economy A$31.5 billion each year.

“Smoking kills. It’s as simple as that,” Roxon said in a statement last month.

Legislation mandating plain packaging, which would prevent the use of company logos, brand imagery or promotional text, will be introduced this year. Already, Australia bans the open display of cigarettes in shops and cigarette packs carry graphic images of diseases blamed on smoking.

‘Bad Thing’

The government’s 25 percent increase in tobacco excise last year raised the cost of a packet of 30 cigarettes by about A$2.20 to about A$17.70. Single cigarette packet prices are now as high as A$20 depending on where they are bought. Small stores and service stations are more expensive, according to figures from the National Retail Association.

Prime Minister Julia Gillard told commercial television in April last year when the government announced the new restrictions that “it’s a bad thing to smoke.”

The Future Fund also invests in Imperial Tobacco Group Plc (IMT), of Bristol, U.K., which last year said it may take legal action against the government proposals. Plain packaging “affects the value of our business” and “takes away the ability of a consumer to identify our brand,” the company said in an e- mailed statement. British American and Philip Morris also opposed the move. Imperial did not reply to a phone message left to it today by Bloomberg News.

Pension Liabilities

British American had 46 percent of the Australian retail market for cigarettes in 2006, according to a 2008 report by Cancer Council Victoria. Philip Morris had a 34 percent share and Imperial had 18 percent.

The Future Fund states its purpose as “accumulating financial assets sufficient to offset the Commonwealth’s unfunded superannuation (pension) liabilities by 2020,” according to a statement of investment policies on its website.

Run by former Commonwealth Bank of Australia (CBA) Chief Executive Officer David Murray, the fund targets an average return of at least the rate of consumer price index plus between 4.5 percent to 5.5 percent per annum as its long-term benchmark with an “acceptable, but not excessive, level of risk.”

The Future Fund had A$71.8 billion in assets at Dec. 31, 2010, according to a portfolio update published on its website on Jan. 28 this year. It had A$2.6 billion invested in Australia’s largest telephone company Telstra Corp., part of the seeded capital provided by the government when the then state- owned Telstra was sold to the public. It has a further A$8 billion invested in Australian equities.

Investment Portfolio

It held A$15.6 billion of equities in developed markets and A$2.3 billion in developing markets, according to a portfolio update posted on its website Jan. 28. The balance of its holdings are in private equity, property, infrastructure, debt and cash.

The tobacco investments as of Dec. 31 were held across 14 companies in nine countries, including South Korea’s KT&G Corp., Japan Tobacco Inc., Gudang Garam TBK PT of Indonesia and Swedish Match AB, according to the Future Fund document provided to Bloomberg.

The Future Fund may have reduced or increased its holdings since and the documents didn’t specify how long the tobacco investments had been held.

To contact the reporters on this story: Gemma Daley in Canberra at gdaley@bloomberg.net Robert Fenner in Melbourne rfenner@bloomberg.net;

To contact the editors responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net; Neil Denslow at ndenslow@bloomberg.net; Nick Gentle at ngentle2@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.