Super Fund idiocy

Last updated 09:25 16/10/2008

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John Key's intention to get the New Zealand Superannuation Fund to invest 40 percent of its money in New Zealand is so ridiculous it almost defies description.

I was no fan of the so-called Cullen Fund when it was set up in 2003 because I thought it was only a 25 percent solution to the country's future pension problem.

But I have been at least partially won over by the way the fund has gone about its job. It has attracted people of true international calibre to run its activities, has applied best practice investment philosophies and has performed out of its socks. Let's forget about the $700 million pre-tax loss this year because this year anybody who has gone within a mile of a share market has seared fingertips.

The fund has managed to get world class stewards like boss Adrian Orr on board because it has been kept wholly separate from the government and there has been no political meddling in its activities - till now.

Let's be clear about what the fund's mandate is: It invests wherever it feels fit to get the best possible return on the taxpayer-funded money it is given. Those returns then go into a big pot that will eventually be used to help the country pay for the baby boomers in retirement.

Now if the fund thought that New Zealand was at all times the best place in the world to invest, it would put all of its money here. At the moment the fund has about 23 percent of its assets tied up in New Zealand, which is a reasonable chunk. But Key wants that to be 40 percent.

By implication he wants the fund to take money from higher returning assets overseas and pump it into lower performing New Zealand assets as a short run boost to the economy. It is an easy way of the government increasing spending, without increasing its budget deficits.

What it means is the returns to the fund are likely to be less in future years than they would be if the fund was left alone. Therefore the fund's ultimate ability to service pension requirements in future will be reduced.

And worse, once the fund has become a play thing and source of easy money for the government to invest in its pet projects, you will lose the very high calibre of people the fund currently has.

There is a world of difference for a highly skilled fund manager between working out the intricacies of where to invest and simply being told where to put money and indeed having to put money in places that they wouldn't choose to. So once the skilled people start leaving - probably to be replaced by grey political "yes man" flunkies then so the returns on the fund will drop further.

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An additional problem is that the New Zealand economy runs the risk of being heavily skewed by the impact of the fund. The fund already at this early stage has to be careful that it does not cause distortions in the markets through its activities. This risk will grow as the fund grows. Forty percent of the $100 billion the fund hopes to one day have is $40 billion. That is a hell of a lot of money to have flying around in the New Zealand economy. You could see a situation where most of the companies on the stock exchange are in large part owned by the fund. This would be unhealthy and would give the markets and the economy an artificial appearance. Any day the Super Fund bought shares the market would go up, if it sold the market would go down and so on. Not a tenable situation.

One of Key's long ago predecessors as National Party leader, Rob Muldoon, won an election by lambasting a superannuation scheme set up by Labour. The argument was that as the Labour super fund grew, then so it could be used as a political tool. National scrapped that scheme after it won in 1975 and delivered us on the route to the future pension problem we now have.

How ironic then that a National leader is now attempting to politicise a fund that has been set up for all of us.

New Zealanders should have absolutely no truck with this idea. Key wants to mess around with money that is set aside for your retirement. In doing so, large chunks of that money could be lost.

Finally, the scheme's architect Michael Cullen, should not escape criticism. On Tuesday he suggested that if Labour won this election it would sit down with the Super Fund and the KiwiSaver providers and see what changes to policy setting the government could make that would encourage those funds to invest in New Zealand.

The language is much milder than Key's, but the implication is clear enough - Labour too would put pressure, however subtle, for more investment in New Zealand.

It all goes to show that the only long term solution to an aging population is for a compulsory super savings scheme that is run by private sector operators and is free from all political influence.

We have seen once again in the past couple of days that politicians can never be trusted to do the right thing with our money. Politics and winning elections always get in the way.

 

- BusinessDay.co.nz

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