Finance Minister says inevitable that NZ Super Fund will make big losses at some point; criticises fund for wanting billions more to manage; says NZ Super gap will be filled by 15 yrs of spending restraint

Finance Minister says inevitable that NZ Super Fund will make big losses at some point; criticises fund for wanting billions more to manage; says NZ Super gap will be filled by 15 yrs of spending restraint

By Bernard Hickey

Finance Minister Bill English has criticised the New Zealand Super Fund over its comments about a likely shortfall in the fund because of the Government's suspension of contributions in 2009.

Under questioning by Labour Finance Spokesman Grant Robertson, English said the fund would eventually make substantial losses and was likely to see its average returns reduce to market levels.

His solution to a likely shortfall by 2030 was for the Government to restrict spending and top up the fund with surpluses closer to the time.

"The fact that it has made 10 percent—that is above the market rate, on average—for the first 15 years or so means it is highly likely it will make negative returns for an extended period some time, because no managed fund beats the market by much over any length of time. So we just did not want to take the risk of borrowing more—for which Labour criticises us—in order to invest in overseas shares," English said.

English said the Guardians of the NZ Super Fund were wrong in saying (as detailed here on the NZ Super Fund's site) that the decision not to contribute had reduced the fund's potential size by NZ$18.2 billion.

"The management of the superannuation fund would of course love to have billions of dollars," English said.

'Would they borrow NZ$5 bln personally?'

"The question I would say to the management of the superannuation fund is whether they would go and borrow NZ$5 billion in order to invest on overseas equities markets that have been deliberately inflated in value by central banks around the world," he said.

"No one knows what will happen to those share funds when central banks stop printing money. One of the preoccupations of world financial markets right now is the risk of the very investments that the superannuation fund has made."

English said the fund's out-performance was no indication of the risks ahead of it.

"A future Minister of Finance may well be in this House defending persistent negative returns on that fund—in fact, I believe that is certain," he said.

Robertson then asked who would fund NZ Super if, as Treasury forecast, the Fund would be NZ$36 billion smaller than it should be by 2030.

English said Governments would have sufficiently large surpluses to top up the fund if they controlled spending for the next 10-15 years.

'Foolish and short-sighted'

Robertson later criticised English as being foolish for not borrowing to invest.

“His refusal to do that is not only short-sighted, it’s foolish financial management. Future generations will be paying the cost of this short term thinking," Robertson said.

“Mr English can’t have it both ways. He has previously basked in the success of the award-winning Super Fund, calling it ‘one of the best-structured sovereign wealth funds in the world’. But today he dismissed the analysis of the Fund as ‘wrong’ and ‘hypothetical’," he said.

"Having kneecapped the Fund, Bill English's only solution to covering the future cost of Superannuation is to cut public services like healthcare and education. That's not something Kiwis will stand for."

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"The question I would say to the management of the superannuation fund is whether they would go and borrow NZ$5 billion in order to invest on overseas equities markets that have been deliberately inflated in value by central banks around the world," he said.

Was it not the aim of QE central banks undertaking LSAP actions to depress sovereign debt yields and force the investing community to buy higher yielding corporate debt? Greater private investment would lead to additional endeavours demanding both materials and labour to satisfy the reach for yield.

Did it not turn out to be more efficient for tax advantaged corporate borrowers to financialise this social wealth redistribution exercise to engage in stock buybacks, mergers etc and forgo the development of future earning activities? Read more

Is the party finally over?

Frankly, Bill English's comment, buried in the text, that "markets have been deliberately inflated in value by central banks around the world" deserves a lot of serious attention

The Federal Reserve has $4½ trillion on its balance sheet which has to be liquidated
The Federal Reserve and Yellen have again pronounced it will begin this year
Is wholesale money about to get dearer?
Is the party finally over? - It seems so

The fact is that the continued and ongoing success of the NZ Super fund throughout the GFC has made a complete fool of the National parties policy to suspend contributions. Classical investing theory is to keep contributing through good and bad times and when the bad times recover is when the big profits are made. They have missed that one. So what if they do have one bad year; there have been a lot of very good years that they have missed out on, that would more than compensate. As for borrowing; there is plenty of cheap money around. English is just annoyed that he has exposed as a fool.

the nats have shown time and again they can not manage money or investments, why would anyone listen to them when they start talking
encourage solid energy to leverage up and when down turn comes dies under its debt
sell best returning assets
stop contributions to the super fund at the time of cheap credit and depressed asset prices
never able to balance the books in 7 years

You are right. It is funny because it is almost as if the political parties make the worst job of what they care the most about. National often do a better job of social policy while Labour are better managers of the economy. (I have to say that Nationals management of the economy seems to be directed at benefiting the top 1/2% or less and not the wider community)

I think fundamentally that the government/taxpayer borrows money to put into a risky fund makes no sense at all and accordingly NZ Super should be unwound. If you disagree with this view then essentially you are saying that NZ Super is some magical organisation that will continue to deliver returns over and above taxpayer cost of funds without risk and the government should just borrow to the hilt and invest with them. i.e. a giant hedge fund. Icelandic bank etc...

English appears not to be able to balance the money foregone since the Nats unsubstantiated personal tax changes in its first year compared to putting a similar amount into the Super Fund. Shame that.

Simple maths show the tax cuts is only a small percentage of borrowing the government has had to do. It was show in the pre election fiscal update before the 2008 election that even the beloved Labour government would have to borrow to fund its last budget and even more for its election bribes.

The simple reason that the government has had to borrow so much is Kiwis did not borrow so much to fund a consumer lead economy which then stopped filling the governments coffers.

How has a guy who has failed 7 out of 7 times to do his job probably got the cheek to criticize anyone?

In hindsight we all should have borrowed to the hilt to buy buy shares during the GFC, and the future might well show that the Super fund should have sold the lot right now.
I just wonder, if I went to the ASB and said; look, I know I already owe 60 billion, but I need to borrow 10 bill per year to buy more shares, what response would I get (if I could not lump potential losses on to the taxpayer)

Maybe they should stop building two roads for every person in Auckland, could have had 10 super funds with the amount of tax payer money that has gone into building new roads and other things for Auckland

Borrowing from the bank to buy equities is known as margin lending with the underlying scrip used as security - usually on a 50%-70% LVR - and subject to margin calls - around about now you would be getting a phone call and or being involuntarily liquidated and your losses realised

Had you invested in off-shore miners you would be having an uncomfortable day today - one of the big 3 AU miners fell 30% overnight, due to debt concerns, which dragged down all the other miners

Govt should be ploughing big money into the Superfund. From the big surpluses they should have created. Oh and drive down debt too.
We are never going to do well without real investment. Trying some fiddle with borrowed cash is not investing.

Most businesses / SMEs borrow to invest, its normal.

What strikes me about BE is he's our finance minister but when he says thing like this he seems out of his depth. ie he doesnt instill confidence.

"persistent negative returns on that fund—in fact, I believe that is certain," he said." I agree, I wonder if it is for the same reasons though....(Peak oil etc) ie we lack reasoning here.

I think the interesting statement he makes is that markets are overvalued because of central bank behaviour. The world is a bubble, and yet there are still people putting down 30% deposits on houses that are probably more than 30% overvalued. At least BE is talking some sense rather than just spin about the state of the world economy.