The New Zealand Superannuation Fund was championed by Dr Michael Cullen, Finance Minister, and set up by the Labour Government early in the 21st century.
The Fund is first and foremost an instrument of long-term fiscal policy. Its objective is to smooth the impact of New Zealand’s ageing population on the Crown’s finances, and hence ensure fiscal and policy stability. Over the next 50 years or so, a permanently higher proportion of the population will become eligible to receive New Zealand Superannuation. This change arises primarily from increasing longevity and declining fertility in the population.
The Fund does not meet all the needs for income, health and other support for older people. People are also encouraged to make their own savings for retirement.
The Fund is managed by a Crown entity, known as 'The Guardians of New Zealand Superannuation'. The Crown owns all assets of the Fund. The key principles that apply to the governance of the Fund are autonomy and accountability.
The effect of the policy is to build up a portfolio of Crown-owned financial assets over the next few decades while the annual costs of New Zealand Superannuation remain relatively low. Those assets will then progressively be drawn on to supplement the annual Budget as the Crown’s finances adjust to a much higher level of ongoing expense for New Zealand Superannuation, providing a smoothing mechanism for what remains fundamentally a 'pay as you go' universal benefit. By 2007, the Crown’s financial assets are projected to be $34.3b (or 23% of GDP). By that year, the NZ Superannuation Fund’s financial assets are projected to be over a third of this figure, at $12.4b (or 8% of GDP).
Future retired people will not receive any larger entitlement to New Zealand Superannuation because of the Fund. The beneficiaries will be the taxpayers of the future, who will not have to face the steep rises in tax rates that would be otherwise needed. Given that the cost of New Zealand Superannuation is forecast to rise from the current 4% of GDP to around 9%, these tax increases would, in the absence of the Fund, be very significant.
David Cunliffe, MP for New Lynn, and Parliamentary Under-Secretary to Finance Minister Dr Cullen, says the Fund can be seen as an extension of the regime of responsible long-term financial management that has been put in place in New Zealand over the past couple of decades. It is about fiscal responsibility, managing long-term fiscal risk, properly balancing assets and liabilities, and avoiding volatility in tax rates.
The Minister of Finance can give directions regarding the government’s expectations as to the Fund’s performance. However, a direction cannot be inconsistent with the Guardians’ duty to invest the Fund on a prudent and commercial basis, and the Guardians must ‘have regard to’ any direction, rather than being required by law to follow it.
The only major constraint on the Fund is that it cannot take a controlling interest in any entity. The Fund operates subject to income tax.
The Guardians are required under the Act to publish an annual Statement of Intent, which sets out the Board’s expectations about the performance of the Fund and the key risks to the performance of the Fund. In addition, an Annual Report must be presented containing an analysis and explanation of the Fund’s performance, a statement of investment policies, and a schedule of investment managers and custodians used by the Guardians and the asset classes for which they were responsible.
The performance of the Guardians is independently reviewed at least every five years. All of these documents will be tabled in Parliament and available for public scrutiny.
This governance framework is not unique to the Fund. It is essentially the framework that the government is applying to all significant Crown-owned funds.
By the time these young singers reach retirement age, the Superannuation Fund will be ‘topping up’ their retirement incomes, if future Governments don’t change Labour’s policy.
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