The Cullen Fund

April 17th, 2010 at 9:48 am by David Farrar

at the Dom Post reports:

Halting contributions to the Cullen superannuation fund has cost the taxpayer more than $30 million.

If full contributions had been maintained, it would have earned almost $50m more, calculations based on the fund’s returns to the end of January show.

Even accounting for the extra borrowing costs the Government would have faced to keep up contributions, that would still have netted taxpayers about $1m a week during the past eight months.

First of all, it has not “cost” the taxpayer anything. The taxpayer may have been able to make a gain of $30 million if it had borrowed more money, for the fund to invest. That is certainly true, but it is a potential gain only.

You can not automatically assume that any additional investments would have achieved the same return as the existing investments. An extra $2 billion may have been invested in a stock that did not do so well, or may have meant a higher average price for buying such stock.

It is fair enough to talk about a potential gain or that was missed, but that is not the same thing as stating that potential gain as a loss let alone a cost. That is a sloppy short cut.

Also it is worth reminding people that reward is always linked to risk. One could borrow $10 billion a year to invest in stocks, and probably get a good return on them. But it would also be risky.

What we don’t know if whether or not we would have got a credit downgrade, if the Government decided to continue to borrow money to invest. And if we had, then that would have had a very real cost on every New Zealander.

It is also worth noting that over the entire life of the fund, the rate of return is still below the risk free rate of return. The NZ economy would be hundreds of millions of dollars better off if the fund had never been set up, and the money used to repay debt.

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47 Responses to “The Cullen Fund”

  1. 3-coil (1,220 comments) says:

    Once again Vernon Small reveals his clumsy political bias with his haste to put the boot into the National-led government.

    Two messages for Vernon:

    1 Do a course in Economics 101 before you try this line of anti-National attack again.
    2 She lost the last election (embroiled in the stench of her corruption) – she’s gone, get over it, move on…

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  2. Positan (390 comments) says:

    “You can not automatically assume that any additional investments would have achieved the same return as the existing investments.”

    Come on David – Labour’s entire rationale and “understanding” of matters fiscal revolves around such nonsensical edicts.

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  3. Luc Hansen (4,573 comments) says:

    The NZ economy would be hundreds of millions of dollars better off if the fund had never been set up, and the money used to repay debt.

    So now your major (only?) client IS the government, and has always claimed to be the sole repository of fiscal rectitude, why, in all its wisdom, doesn’t it cash the thing up?

    Or is it a case of timid is as timid does?

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  4. Minnie (98 comments) says:

    Hindsight is the only certain way to invest, but it’s usually a little late. You can be equally certain the likes of Vernon Small would be putting the boot in if the Government had decided to continue contributions, but the investments had gone further south and debt had climbed. Now that would be a real disaster.

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  5. Luc Hansen (4,573 comments) says:

    Minnie, you may not have noticed from your viewpoint, but we ARE a disaster, debtwise, anyway.

    Mickey ain’t got nuttin on us!

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  6. 3-coil (1,220 comments) says:

    I’m looking forward to Vernon Small’s article on how much the “Cullen train set” has cost the country :-)

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  7. Sonny Blount (1,782 comments) says:

    Did Vernon Small put any of his own money into these sure investments when he said the government should have?

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  8. john.bt (170 comments) says:

    Could someone please remind me how many billions in deficit we are following 9 years of Labour and their spending. And who takes any notice of Vernon ? He only writes what Cullen tells him to.

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  9. James Stephenson (2,177 comments) says:

    How much did the taxpayer lose by not betting on the Melbourne Cup? I think we should be told!

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  10. odysseus (26 comments) says:

    Come on DPF, you know very well this was ineptitude of the highest order.

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  11. Sonny Blount (1,782 comments) says:

    Come on DPF, you know very well this was ineptitude of the highest order.

    Ah, the brilliant debating style of a leftie. Fantastic use of facts, observation, and analysis.

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  12. Paulus (2,627 comments) says:

    Sloppy so called reporting.

    Typical of Small, who oviously has no real idea of what he writing, but that’s “par for the course”, with many unintelligent so called reporters.

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  13. burt (8,269 comments) says:

    Sloppy indeed. Did you know that if the state had sold all it’s state houses in mid 2008 then purchased them all back late 2009 they could have purchased a few hundred more than they started with due to the fall in property values. Wow, how stupid were Labour for not knowing in advance what was going to happen to property prices and not providing National with the opportunity to invest wisely…. That is it really isn’t Vernon, Labour spent all the cash and National had to react, just like in 1990 but I guess you conveniently forgot about that as well. Ya Muppet.

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  14. MikeG (425 comments) says:

    “The NZ economy would be hundreds of millions of dollars better off if the fund had never been set up, and the money used to repay debt.”
    So on that basis any of us with mortgages should not be saving for our retirement, but putting it all into paying off the mortgage.

    [DPF: Wrong comparison. The comparison is your day to day expenses are 10% greater than you wages. Should you borrow money from the bank, so you can invest it in the share market so in the future you can use the investment as a mortgage deposit.]

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  15. burt (8,269 comments) says:

    MikeG

    Can you earn more interest than you pay on your mortgage ? BTW: Things may change but currently you are better off to move out of your own house and put tenants into it while you rent elsewhere. But hey, never let fiscal reality stand in the way of obscure reasoning to justify the white elephant Cullen fund.

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  16. emmess (1,428 comments) says:

    How much did Labour’s tax increases cost NZer’s in lost investments?

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  17. burt (8,269 comments) says:

    emmess

    I think Labour only ever evaluate their policies in terms of their chances for winning elections so I suspect that concept behind that question would completely confuse them.

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  18. Viking2 (11,471 comments) says:

    How much did Labour cost the shareholders of Telecom and AIA by attacking the market place? More than the loss of the super scheme.

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  19. MikeG (425 comments) says:

    The money invested didn’t all go “out of the NZ economy” as Farrar alleges, for example, the recent purchase of the Shell Petrol Stations. Now the profits from those won’t go off-shore, so the NZ economy is better off.

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  20. annie (539 comments) says:

    I just wish politicians could set up a superannuation scheme and then leave the damned thing alone. Unreliability of super schemes has been a constant since the Lange government disabled the previous National scheme.

    You can’t begin to expect people to save if you constantly move the goalposts. The real cost of this decision comes further down the track, when people retire.

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  21. Chuck Bird (4,883 comments) says:

    I wonder how much money Vernon Small or Cullen has personally made off the share markets. I have done very well but now with borrowed money. The share market is pretty safe for the long term investor who is prepared to ride out a bear markets that may last 2 or 3 years. I had a small overall loss at the bottom of the market. I put in more of my own money but I would not have dreamed of borrowing any. I bet neither Small or Cullen put any of their own money in the share market let alone borrowed money personally.

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  22. Inky_the_Red (759 comments) says:

    The facts are
    1. that there will be more people over 65 in 30 years time (in NZ).
    2. as a proportion of NZ population there will be more people over 65.
    3. the portion of people 18-65 (working age) will be lower than today
    4. in NZ we pay people to be retired
    5. as a proportion of tax superannuation will increase

    So what are the options?
    Raise the retirement age.
    Reduce the amount paid in National Super
    Means test
    Save money now for the future (the Cullen Fund) while the tax take is high (ok not the case this week)
    Others?

    Which do you think is easiest to sell to aging voters?

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  23. Inky_the_Red (759 comments) says:

    Other options
    1. Educate the population better to earn more in the future
    2. Invest in infrastructure that could earn more in the future (as NZ business hates capital expenditure this would have to done by the government. However the right (Act, National, Labour) will tell you government can’t run businesses so I guess this was never an option)

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  24. Kimble (4,438 comments) says:

    I am so sick of people commenting on investing decisions AFTER the fact. Like those wankers that complain that their fund manager didnt divest all of their equity holdings just before the crash because EVERYONE SAW IT COMING dont you know?

    Stopping the contributions wasnt an investment decision, so criticising it as such is nothing more than stupid. English didnt stop the contributions because he thought the markets were going to fall further. He never said anything even remotely like that.

    I would be saying exactly the same thing if the markets had crashed again and the government tried to say that they should get credit for not putting in any more money.

    MikeG, if you want to argue that point, where did the money go to that was being used to pay for the Shell Petrol Stations? Were they already NZ owned? If they weren’t, then surely that money went overseas? If they were, then there is no net “benefit” from the investment, is there?

    The profits being retained in NZ are very small in comparison, it would take a decade or more of above normal profits to offset the original purchase.

    Your whole argument is wrong headed anyway, but I thought I should point out it was also logically inconsistent.

    DPFs last paragraph is his best one. If Small wants to play that stupid game, then he still loses on points.

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  25. Chuck Bird (4,883 comments) says:

    Inky The Red, how much money did you borrow to make a profit on the share market? If you would not risk your money why should the government do it with my money?

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  26. Inky_the_Red (759 comments) says:

    I have a mortgage own about $3k spend on shares and put money about $15k into a super fund. Total amount of extra mortgage is about $18k. Not much but still more than zero, more than I thought

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  27. MikeG (425 comments) says:

    Kimble – and money to repay debt isn’t going overseas?

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  28. Chuck Bird (4,883 comments) says:

    Inky, thanks for that. One more question. Is the super fund you contribute to subsidised by by your employer or the government?

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  29. Viking2 (11,471 comments) says:

    Chuck, you forgot the tax payer as that really funds the Govt. to subsidize his super.

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  30. Chuck Bird (4,883 comments) says:

    “Chuck, you forgot the tax payer as that really funds the Govt. to subsidize his super.”

    Viking, if you are referring to the general super that everyone get without a means test of individuate contribution I am well aware of it and support the this until something better takes its place.

    The debate is about whether a government should borrow money to play local and international stock markets. I do not think they should even if it is to fund general superannuation.

    I would be in favour of compulsory super to gradually replace the system we have. The reason for that is the in NZ we do not leave people to starve if they cannot earn a living due to health issues or age.

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  31. rouppe (971 comments) says:

    How about the Cullen Fund offer what would essentially be a KiwiSaver Fund? A single ‘Growth’ product, with no fees (since they’re already managing a portfolio). They would get an absolute flood of money cause they seem to be doing OK, there’s no fees, and the custodians do not have a vested interest in making a profit for themselves…

    I’d switch

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  32. ISeeRed (236 comments) says:

    Just cash in the Cullen Fund to fund immediate income and company tax cuts to 19% or less. Tax revenues will bounce back as economic growth takes off, boosting tax revenues in the medium to long term higher than keeping rates at present levels or shaving a pathetic 1% or 2% off. I’d keep Kiwisaver, but scrap WFF, ETS and RMA. We need Hong Kong’s tax rates, Singapore’s social welfare system, Switzerland’s health system and Sweden’s education system to stop the rot and put NZ on the right track to excellence and prosperity. We’re not rich and can’t afford to keep spending a third of the government budget on income transfers and soul-destroying welfare.

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  33. Grizz (605 comments) says:

    Inky, funding the retirement and caring for our elderly is going to be an increasing challenge in the years to come. I can see that you are not stupid. I can see that even you understand that you cannot invest money you do not have. It is not the roll of government to speculate with money they do not have. Just take a look at the global financial disaster or the recipe for the crash of 87. It was all leaveraged speculation. When the markets sneeze, losses increase. Iceland were foolish to believe they could borrow their GDP many times over. Now dead broke, they have been set back decades.

    I am interested though in this statement later in the article:
    “Labour leader Phil Goff said the foregone income backed up his view that National’s decision to suspend contributions was stupid. “It has cost New Zealand taxpayers tens of millions of dollars in less than a year and has undermined the certainty and future of the super fund.”
    Yes quite Phil, and when the losses on borrowed money mounted you would have said the opposite. You are increasingly showing that your appeal is to the stupid and uninitiated.

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  34. Grizz (605 comments) says:

    If borrowing 2 billion dollars was a good idea, they should have gone for the jugular and borrowed a whole trillion!

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  35. Inky_the_Red (759 comments) says:

    i’m not in Kiwi Saver and I didn’t count my employers contribution and they have subsidised me. The 15k is my contribution before earnings. My employer has paid another 4-5K

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  36. Michael Littlewood (15 comments) says:

    If we accept that borrowing money to invest in financial markets over the last eight months wasn’t that great an idea, the same logic applies to all the money already in the NZSF – about $16 billion. The government has significant debt in all parts of its balance sheet (that has been the case since the NZSF started) and, each day, has a choice: sell NZSF assets and repay debt or maintain borrowings and retain the assets. Investing in, say, shares in the presence of debt is the same as borrowing to buy those shares.

    Every dollar of financial assets in the NZSF is therefore, effectively, a borrowed dollar.

    If the Guardians don’t achieve a return of at least the cost of the government’s most expensive debt each year, the NZSF has lost money as far as the government’s overall financial position is concerned.

    That loss had accumulated to about $2.6 billion at 30 June 2009. The recovery in markets to end-2009 had reduced it to ‘only’ $1.4 billion (that’s a rough estimate until we see audited accounts for 2010).

    And if we are really worried about the cost of New Zealand Superannuation (I am not sure we should be), the NZSF doesn’t change that cost; it just rearranges its incidence. The actual cost is the benefits paid.

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  37. Chuck Bird (4,883 comments) says:

    Thanks for that Inky. I do not quite understand though. Is your employer contributing to a super scheme different to Kiwi Saver?
    If your employer is contributing you must have to contribute to get their subsidy. As I understand you have paid another 15k aside from any employer subsidised scheme.

    Whether putting money in the share market while carrying a mortgage makes sense would depend on the mortgage. If it was fixed term you would not be able to reduce it with out penalty. In any case 15k is not a large amount.

    If an individual has a large mortgage on a floating rate it would make much more sense to reduce it than play the share market.

    The same principle applies to the government. We are borrowing $250 million a week. It would not have been prudent to borrow more to take a punt on the share market. Not many predicted the size of the drop in the share market. I doubt if many thought a year ago the Dow would be over 11000.

    Grizz cover most of what I could say. It might make sense for a government to put money long term in the international share market to fund super but not when we are so heavily in debt.

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  38. wreck1080 (3,912 comments) says:

    Very easy in hindsight to say you should have bought or sold.

    Stock market returns average out to around 8% per year, some years higher, some lower.

    I don’t think the govt should invest in stocks full stop. This is my (taxpayer) money, and I’d prefer to decide how to spend it myself thank you.

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  39. Chuck Bird (4,883 comments) says:

    wreak1080, and how do you think super should be funded or do you think if someone who reaches old age and has no money for whatever reason that they should have to depend on family if they have any or on charity?

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  40. Michael (909 comments) says:

    Having seen the Forbes list of the richest fictional characters, does Phil Goff have Alice Cullen as his Financial Advisor? It’s the only way he could have known that the equity markets were going to go up.

    On a more serious note, the Government needed to reduce it’s borrowings to avoid a credit downgrade. While the Government might have made more on the Cullen fund, it probably would have higher borrowing costs associated with the worse risk rating of several credit agencies against it.

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  41. fin (1 comment) says:

    “The NZ economy would be hundreds of millions of dollars better off if the fund had never been set up, and the money used to repay debt.”
    So we should cash in the super fund and pay off our debt. We would then need to ensure there is money put aside for future super needs.

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  42. garethw (205 comments) says:

    It is also worth noting that over the entire life of the fund, the rate of return is still below the risk free rate of return
    By how much? 0.16%. Not exactly a huge gulf. This is a long-term investment vehicle that is but years into a 20yr+ investment strategy – the “entire life”? More like over the “entire infancy”. So when it goes past risk-free in a few months time will you be lauding it?

    And stop hiding behind “theoretical potential losses” – it was pointed out frequently at the time that stopping contributions during low asset value periods meant English et al were specifically throwing out the benefits of dollar cost averaging – you can certainly argue that the money was just not there to contribute and that is fine, but from the investments point of view it was a terrible play and they knew it.
    Should I go back through your posts about how it was losing $x million a year and look for all your admonishments that this was only a potential loss and they were being economically illiterate? Surely I’ll be able to easily find those yeah?

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  43. wreck1080 (3,912 comments) says:

    Super could be funded the same way I would save for my own retirement. You put away a bit of money each year.

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  44. burt (8,269 comments) says:

    wreck1080

    The problem is that the current retirees were told why they were working that by paying higher taxes then they would be looked after in retirement. Young ones now have the message that they need to save for retirement, the great socialist dream of one size fits all retiring with dignity has failed. The Cullen fund is Labour’s compensation for having such as stuffed up ideology when introducing ‘cradle to the grave’ all them years ago.

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  45. Poliwatch (335 comments) says:

    “he great socialist dream of one size fits all retiring with dignity has failed”

    Burt – I totally agree with you. This scheme was created by the greatest socialist Prime Minister we have ever had back in 1976 and we have been living with the growing legacy ever since.

    Oh – what politicians will do for a vote.

    As for the Cullen fund – again it was just slippery words by politicians. I agree with the fund only to the extent of it putting away money in the good times to be used in the bad – prudent. The slippery part was telling us it was a retirement fund. And now we believe it and so don’t want it touched.

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  46. david (2,557 comments) says:

    At the end of the discussion we still need to recognise that the Cullen Fund was set up to invest Government Surpluses. No surplus = no additional investment.

    That is quite apart from the discussion that should be had i.e.

    Should a government ever run a surplus?

    discuss

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