John Key’s proposal to allow the Minister of Finance to tell the New Zealand Superannuation Fund the proportion of funds it should invest in New Zealand is a disturbing development.

It is disturbing because it raises the prospect of politicians directing the Super Fund to invest in their pet political projects, regardless of whether these are viable or not.

This would be totally inconsistent with the objective of the fund, which is to achieve superior investment returns in order to make a meaningful contribution to the country’s burgeoning national superannuation liability.

To understand the issue we need to look at a number of items including demographics, the establishment of the Super Fund and its mandate.

The ageing of society is one of the major issues facing New Zealand and most other Western countries.

As the accompanying table shows the number of people aged 65 and over is expected to increase from just 500,000, or 12.2 per cent of the population, in 2005 to an estimated 1,176,000, or 23.1 per cent of inhabitants, in 2040.

The post-World War II baby boom generation has had a huge impact on society over the past 60 years and this will continue.

This generation put colossal pressure on the educational system in the 1950s and 1960s, bulked up the workforce in the 1970s, 1980s and 1990s and will demand enormous expenditure on their national superannuation and healthcare needs over the next 30 to 40 years.

Treasury models indicate that the Crown’s expenditure on national superannuation will increase from $6.1 billion in 2005 to $29.6 billion in 2030 and a staggering $50 billion in 2040.

Government health expenditure is predicted to escalate from $8.4 billion in 2005 to $40.6 billion in 2030 and $67.9 billion in 2040.

Thus total Crown expenditure on national superannuation and healthcare is projected to surge from $14.5 billion in 2005 to $117.9 billion in 2040 according to the Treasury’s model.
Who will pay for this?

Future taxpayers will have to foot the bill unless baby boomers put something aside for their national superannuation and healthcare requirements.

A total dependency on future taxpayers is unrealistic because the ratio of taxpayers, those between 25 and 64, to retirees is dropping dramatically. In other words there will be fewer and fewer workers per retiree to pay these huge bills.

The last column in the accompanying table shows there were 5.3 taxpayers for every retiree in 1950 and 4.3 to one in 2005. This ratio is predicted to drop to 2.4 workers for every retiree in 2030 and 2.1 to one in 2040.

The NZ Superannuation Fund was established to help partly fund the massive national superannuation bill from the mid-2020s onwards. It was based on the premise that baby boomers should make some contribution to their national superannuation.

Baby boomers have had enough good fortune without dumping all of their old age requirements on the next generation.

According to a Treasury working paper the primary objective of the Super Fund is to improve the long-term sustainability of the national superannuation entitlement at 65 per cent of the average after-tax wage. Other objectives of the fund were to increase national savings, enhance the Crown’s capacity to withstand unexpected future events and better manage the tension between the short-term and long-term demands on Government finances.

Under its mandate the Guardians of New Zealand Superannuation must invest the Super Fund on a prudent, commercial basis and, in doing so, are required to manage the fund in a manner consistent with:
(a) Best-practice portfolio management;
(b) Maximising return without undue risk to the fund as a whole; and
(c) Avoiding prejudice to New Zealand’s reputation as a responsible member of the world community.

The legislation does not provide any guidance on these three requirements – that is left to the Guardians to decide.

The Super Fund, which has a somewhat similar structure to the Reserve Bank, has been designed to be independent and have an arm’s length relationship with the Government. This is important because it means that politicians cannot access the fund for pet projects.

This writer has held the view that the first assault on the fund by politicians would be benign and largely supported by the public. But this would establish a dangerous precedent that could lead to more raids on the fund for less benevolent causes.

For example, a major party might seduce a potential coalition partner by promising to spend Super Fund money on the pet project of the minor party.

There was considerable debate at early Guardian meetings about the sum of money that would be invested in New Zealand.

The amount was restricted by the limited size of the country’s capital markets, legal restrictions (the fund is not allowed to control any entity) and the need to have some offshore earnings because the vast bulk of national superannuation will be sourced from tax revenue collected in NZ dollars.

The Super Fund now has 23 per cent of its investments in New Zealand, which is far higher than some of the major investment consulting organisations would recommend.

On Wednesday, the National Party announced that it would “allow the Minister of Finance to give direction to the Guardians of the Fund in relation to the proportion of the fund which is to be allocated to New Zealand. National will set the target of at least 40 per cent of the Super Fund to be invested in New Zealand”.

The issue here is not the “at least 40 per cent” but the fact that the politicians want to tell the Guardians where to invest the fund. This breaches one of the key components of the relationship between the Super Fund and politicians.

There is probably widespread support for this proposal but it sets a dangerous precedent. How many voters would be happy if the next step is for a major party to offer to spend Super Fund money on a major solar energy project in order to entice the Greens to become a coalition partner?

The other issue is the importance of maximising the fund’s returns because of the huge impact of compounding over the long term. For example, if the Super Fund is required to invest in projects in New Zealand, which would reduce its overall average annual return from 10 per cent to 8 per cent per annum, then the current fund of $14 billion will be worth $164 billion, instead of $295 billion in 2040.

This assumes no new contributions and no withdrawals.

It is vitally important that we continue to have long-term investment objectives for the fund because the difference between 8 per cent and 10 per cent return over 32 years could determine whether national superannuation is fully sustainable.

This column fully supports more investment in New Zealand but has major reservations about raiding the country’s only long-term savings fund to achieve this goal, mainly because it sets a dangerous precedent as far as future political meddling in the fund is concerned.

The preferred option would be for the major political parties to obtain investment funds from another source or create a dynamic domestic economy which is highly attractive to the New Zealand Superannuation Fund because of the superior investment returns on offer.

The Greying of NZ – Who will pay for National Superannuation?



Under 25


65 & over


National Super($b)

Worker per retiree