NZ Super Fund returns

February 7th, 2013 at 12:00 pm by David Farrar

James Weir at Stuff reports:

The New Zealand Superannuation Fund has beaten the cost of debt by $346 million over nine years, according to a new analysis.

That “modest achievement” was not enough to justify the risks run by the Government’s Super Fund, according to an analysis by the Retirement Policy and Research Centre co-director Michael Littlewood.

The research centre is based at Auckland University.

The reality is that the impact of the on future affordability of superannuation was always going to be fairly modest, and that was even with optimistic levels of returns. When the level of returns is barely more than the cost of debt, it does raise issues over its importance.

The only proper way to measure that was by comparing the fund’s return with the cost of long-term government debt.

“That’s because the Government, if it wished, [could] sell the NZSF investments and repay that debt,” Littlewood said.

The Government had the choice with each contribution to either cut debt or ask the fund’s guardians to invest the money.

Like a household, it was not sensible to raise a mortgage on the family home and invest the proceeds in shares and other investments, unless the before-tax returns were better than the cost of debt.

Against that measure the Super Fund’s returns were “less than comforting”, Littlewood said.

In the year to June 2012, the Super Fund lost $645m based on what it could have saved by paying off debt instead.

That loss was based on the 5.04 per cent yield on 10-year government stock, against the fund’s guardians’ published return for the year of 1.1 per cent, giving a loss of $645m.

My concern is that we still have a high risk of significant failures in the US economy and the EU – and that would drive down returns again from the Super Fund.

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27 Responses to “NZ Super Fund returns”

  1. tamati (58 comments) says:

    Why do we need a great big public piggy bank when we have Kiwisaver?

    I say we make Kiwisaver compulsory and the government increases their contribution. But instead of paying for the increased contributions from revenue, they drawn down on the superfund. When the superfund runs out, they return to current payment levels.

    That way, they are simply transferring super savings from the state to the individual.

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  2. Cunningham (746 comments) says:

    Piss me off when politics comes before what is good for the country because lets face it, that is exactly what the super fund is used for (the left to try and make out that they are responsible with our money). At the very least Nat stop contributing.

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  3. trout (865 comments) says:

    Did not the Greens propose that the Govt. keep up contributions to the Fund by borrowing? The irony is that the funds are likely invested in the industries that the greens are busy ‘white anting’.

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  4. PTM (41 comments) says:

    Why borrow when you could boost the sum invested by simply printing a trillion dollars and depositing it into the fund.
    A no brainer really.

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  5. Jack5 (4,216 comments) says:

    Three questions about the Super Fund.

    First, is it okay for the State to invest for us (it is taxpayer money), and even subsidise our savings (the Kiwisaver hook)? What happened to inidividual responsibility?

    Second, how can we tell how good the fund’s management is when so much of its success or failure depends on the movement of international currencies (largely NZ dollar v US dollar)? These things are outside the management’s ability to control, and even to forecast accurately.

    Third, is it logical to have such a Labour-initiated scheme pouring our funds abroad when we are increasingly having to use foreign capital to develop our industries (for example, baby-formula factories)?

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  6. tvb (3,938 comments) says:

    The superfund is an accounting fiction invented by Dr Cullen to soak up Government surpluses and take the political pressure off tax cuts. Once the money ran out as it always does with Labour Governments there was little point in maintaining the fiction. The find should be liquidated and debt be paid down. But the politics of this will need careful management.

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  7. BeaB (1,945 comments) says:

    Sadly it has become a sacred cow like many of our bright ideas like WFF that end up costing us a fortune,

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  8. Paulus (2,293 comments) says:

    It is possible to merge KiwiSaver into this fund, as the the Super fund managers can do giver a better long term return that the plethora of Kiwisaver fund managers, most of whom are giving a next to nil return. That is if you can find out what the return is.
    Look at Australia to see the model.
    Most fund managers are only in it for their return, not the members. Remember they were the leading pushers for Kiwisaver.
    Show me a comparison of earnings – Yea !!! I bet you couln’t understand it anyway as it would be obfuscated.
    Yes – make it compulsory for all workers. Meld the exisiting Kaiwsaver members into their own fund as within the Super fund, and make everybody a member through their IRD number. Build it up slowly – it is possible – but the existing Kiwisaver fund managers will fight like hell to keep nest egg.

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  9. dime (8,750 comments) says:

    thank god we arent contributing to it now.

    surely under the treaty it belongs to maori anyway…

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  10. seanmaitland (401 comments) says:

    @ tamati – making KiwiSaver compulsory has so many things wrong with it.

    1. You’re not guaranteed to get what you put in, out at the end – you are at the whims of the sharemarket and current global climate.
    2. There are several hundred thousand contractors in NZ, who all would be required to put in their employer contributions as well as the employee contributions.
    3. There are loads of people who are successfully managing their own retirement – forcing them to contribute to KiwiSaver is wrong.
    4. You are locked in until you are 65 with KiwiSaver – what if you want to retire when you are 50?
    5. Its a complete waste of money, and the only reason it ever looks good is because the government and employers are putting in money to top it up. How did Gareth Morgan’s scheme manage to lose tens of millions of dollars?

    It would be far better to means test super annuation, so that any actual net income generated by assets, companies or trusts a person has is taken into counted as income – that would cut a big chunk off of the Super Annuation bill each year and be fair.

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  11. gazzmaniac (2,266 comments) says:

    I like the Australian super model. It’s been around for about 20 years, and while it was controversial at the time it is certainly not controversial now. It is one of the best things that Paul Keating did for Australia. I’d vote for Winston Peters if he had another referrendum on compulsory super.
    There is sufficient competition in Australia (including the ability for someone to run their own fund, within certain rules) and disclosure requirements so that if your super fund is doing poorly you can change it. And easily.

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  12. gump (1,228 comments) says:

    When did $346 million dollars become insignificant?

    The average cost of borrowing has been (by historical standards) very low for the the last ten years. So it’s not surprising that the delta isn’t huge. The real test will be over a 20+ year timeline.

    It’s also hard to look past the benefits of better capitalisation in our local capital markets.

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  13. tamati (58 comments) says:

    @ Sean

    1. Providing you invest over a longer period of time, you will make gains in the long term. There may be short-term fluctuations, but in the end you can expect to make a return. Any savings scheme has to be invested, unless you want to stuff cash under your matress?

    2. It could easily be changed so that self employed people would only have to contribute once over, as an employer.

    3. People are welcome to save for their retirement outside Kiwisaver. People are already forced to contribute to the current scheme through higher taxes. End it – lower taxes.

    4. I’m happy for people who reach a certain level of savings to have the oppurtunity to break the nest egg early, or simply be able to suspend contributing. Let’s face it, only those who are very very successful will be able to retire at fifty comfortably. And who would want to spend almost half their life “retired”

    5. Anyone who was dumb enough to invest with Gareth Morgan deserves to loose money. But I’d support stricter controlls on managers fees and opening up competition for the Kiwisaver providers. —Something like what’s my number website?

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  14. Michael Littlewood (15 comments) says:

    The government has effectively borrowed the $20 bn already in the Fund (because it could sell the investments and repay debt).

    If that’s such a great idea, why doesn’t the government borrow another $20-40 billion (why not $100 bn?) and put that into international, even local, markets? If that doesn’t sound too clever (my thesis) then neither does the current arrangement.

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  15. dime (8,750 comments) says:

    sean – i think they changed some of the rules in aussie. you can now manage the find yourself.

    my buddy pulled his super out and put it into a couple of rentals..

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  16. krazykiwi (9,188 comments) says:

    How did Gareth Morgan’s scheme manage to lose tens of millions of dollars?

    Awww, stop your caterwauling :D

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  17. gazzmaniac (2,266 comments) says:

    dime – they certainly have changed the rules, and Self Managed Super Funds are becoming a real threat to the “professional” fund managers. It’s no longer for people with hundreds of thousands of dollars in super. I’ve got a SMSF with less than $100k in it and the overheads are less (since I do my own accounts) than the 1-2% “administration” fees that the retail funds charge. Plus I don’t lose my money like SunSuper did for four years before I set up my own fund.

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  18. dime (8,750 comments) says:

    gazz – if we did that here, Dime would jump in to kiwisaver. happy as.

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  19. s.russell (1,486 comments) says:

    While the Super Fund is marginal in terms of the economic case, its real value is political.

    Every dollar that Labour put in to the Cullen Fund was a dollar that was not available for Labour to spend.

    If Cullen had thought like Littlewood and figured the money was better put into running larger surpluses and paying off debt, how long would it have lasted? Not long, I bet. His collegues would soon have hijacked that cash and spent it – and it would have been on stuff like benefits that a future Govt could not easily cut when the surpluses disappeared. Whereas it was easy for this Govt to suspend contributions in the face of the GFC.

    In my view, the Fund was one of the few really good things that Cullen and the former Labour Government did.

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  20. DJP6-25 (1,229 comments) says:

    krazykiwi 2:47 pm. The money wasn’t lost. A feral cat got into the vault and ate it.

    cheers

    David Prosser

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  21. Jack5 (4,216 comments) says:

    Sean Maitland (1.30 post) asked:

    How did Gareth Morgan’s scheme manage to lose tens of millions of dollars?

    Tamati (2.06 post) said:

    Anyone who was dumb enough to invest with Gareth Morgan deserves to loose money..

    Krazykiwi(2.47post) responded to Tamati:

    Awww, stop your caterwauling…

    David Prosser (DJP6-25) riposted at 4.39:

    The money wasn’t lost. A feral cat got into the vault and ate it.

    Thanks guys. We now know why Morgan is so pissed off about cats. THe only thing the felines didn’t get was Morgan’s tongue.

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  22. garethw (205 comments) says:

    FFS, the Super Fund isn’t some standalone investment fund that’s going to magically pay for Superannuation. The level of misunderstanding around what it’s for (sometimes purposefully mischevious, mosttimes not) is staggering.

    Super costs are rocketing up over the mid-term. So the current working (taxpaying) generation are upping their contribution to Super now to the 40 year average level, rather than just loading the cost on the next generation of taxpayers and crippling the taxpayer. So for now, there is an excess to make up their level of contribution to that 40 year average. That excess is (well, was) the contribution to the Superfund, that then invests it rather than just hoarding it in a giant pile somewhere. Based on getting average returns, that “excess” in Super payments would have actually reversed in ~5yrs IIRC and the Fund would have started contributing back to Super payments – hence lowering the Super payment by taxpayers. Read the legislation setting it up, it’s all quite obvious.

    But greedy politicians and taxpayers couldn’t see past their 2 year “give me the tax break” view and insist on paying the immediate low cost of super rather than the mid-term average. Good one.

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  23. Alan Johnstone (908 comments) says:

    It’s also vital that we get pension reform.

    The idea that we can have universal benefit at 67% of average wages for ever is a sick joke.

    It’s the biggest problem I have with the John Key administration

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  24. slijmbal (1,133 comments) says:

    I remember posting years ago why the Cullen Fund was such a dog but am to lazy to dig up the post .. but basically

    What is missed in the calculations are the costs of removal of funds from the economy. There are clear metrics out of OECD and similar that show dragging the equivalent of close to 20% of a years GDP out of the economy over several years has a significant drag on growth.

    The Cullen fund was possibly as bad as WFF in terms of smacking the economy in the chops. It is fundamentally flawed.

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  25. SPC (4,634 comments) says:

    slijmbal – there is no difference between $2B going into the Cullen Fund out of tax surplus and $2B going into Kiwi Saver. The impact of money withdrawn from the economy to be placed into investment is the same.

    WFF does not take money out of the economy.

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  26. SPC (4,634 comments) says:

    tamati, the tax paid super liability is unchanged whether compulsory Kiwi Saver exists or not. Those proposing it have to explain how it co-exists with tax paid super (whether age 65 or age 67 or age 70) and how tax paid super at 65% (or over) of the net of tax average wage is to be afforded. Placing Cullen Fund money into Kiwi Saver accounts makes it even less affordable.

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  27. slijmbal (1,133 comments) says:

    SPC says “slijmbal – there is no difference between $2B going into the Cullen Fund out of tax surplus and $2B going into Kiwi Saver. The impact of money withdrawn from the economy to be placed into investment is the same.”

    Bollocks – bulk of Cullen’s Folly is invested abroad – and we took $12B+ or so out of the economy

    “WFF does not take money out of the economy.” never said it did – I just said it is yet another bit of bad economics – it is welfare wasting money by taking it off middle-ish wage earners and giving much of it back to the same people having pissed a load of it away paying for bureaucrats in the middle. I suppose it does take money out the economy by adding inefficiencies now I think about it.

    and by the way a tax ‘surplus’ is by definition adding inefficiencies.

    Your grasp of very, very, very basic economics is pretty feeble.

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