By Gareth Morgan With contributions from the Government now suspended, the Cullen Fund is stalled midstream, worth NZ$12.5bn at latest count, having received NZ$15.2bn in contributions. Think about what the purpose of this project was "“ to pre-fund NZ Superannuation to an estimated extent of about 14%. In other words when the hordes of baby-boomer retirees are drawing their NZ Superannuation entitlement in 2040, only 86% of that hand-out would be coming from the taxpayers of the day, the rest would be provided by the Cullen Fund. With the 10 year delay to contributions the onus on the taxpayers of the day will rise to at least 93%. Why bother?
The reality is that the dream is over, economic circumstances have rendered the Cullen Fund a white elephant, although it was looking increasingly doomed anyway before the credit crunch sent the NZ government accounts into a spiral. The other factors conspiring to send the Cullen Fund to the funeral pyre included; John Key's absent-minded utterance that 40% of it should be ear-tagged for pet projects the politicians of the day might dream up as wonderful things to do for New Zealand. The substandard performance of the fund managers, inevitable given its brain-dead, buy-and-hold or set-and-forget strategy, typical of the worst of the world's fund managers. The suggestion that the fund manager, in a bid to make up for terrible performance, would lift the risk profile and enter the property development world, not only signalling a departure from its core business, but more disturbingly crowding out private sector activity in that sector. No reliance whatever can be placed on politicians' promises deep into the future that there will be a contributions catch-up some day never. In reality that thing is now stuck at around $12-$15bn, which is plenty enough to distort domestic markets should some silly politician decide that in the national interest the Fund should invest domestically, but not large enough to make any meaningful difference to the future tax demands of NZ Superannuation. At least the government has acknowledged that to borrow and fund it would be the epitome of financial illiteracy but it has only done half the job. It needs to garner the courage to declare that the Cullen Fund is the proverbial "dead duck". Next, what has to be decided is what to do with the $12.5bn. There is a silver lining. What Should be Done? Immediately the Cullen Fund should be shut down, and the NZ$12.5 billion given back to the public in the form of KiwiSaver contributions. This would in effect privatise the property and get it out of the clutches of politicians. After all it was the tax cuts that Cullen denied Kiwis that funded this monster, so by rights it's the public's money. By this route KiwiSaver would in effect be made compulsory overnight "“ as all Kiwi taxpayers would get some of it (NZ$3,000 each if it were done crudely) in their accounts, which would form the base of their retirement fund. Remember in Australia compulsory superannuation contributions are 9% of salaries (over $3,000 per annum). That's the first of two vital steps. Next the government needs to join similar economies overseas and declare that the age of entitlement to New Zealand Superannuation is going to be stepped up from 65 to 70 or thereabouts. The UK has theirs at 68, the US is at 67 and Australia has just announced theirs is going to 67 over the next 14 years. Why do we "“ this highly indebted nation "“ remain in denial and cling to the lie that it can be maintained at 65? It is a total illusion and John Key needs to show some leadership here "“ the longer the lead-in period for people the more they can plan. That he has said the age of entitlement won't rise on his watch is just plain silly, not thought through and closes the door on a great opportunity to patch up Labour's approach to superannuation. Political cowardice (or is that short term pragmatism?) rather than any prescient appreciation of the future is why Mr Key has opted to dodge calling a spade a spade. The beauty about KiwiSaver is that it is private accounts "“ it is your money "“ and a politician cannot usurp it to meet their own agendas as John Key muttered he'd be doing with the Cullen Fund. That is a very important benefit of a civilised society "“ where property rights have to be respected "“ and it's on those alone that, in the end, we the individuals can rely. As we've just seen, we certainly cannot rely on governments and their plans "“ at least not over any time frame longer than the election cycle. Details of why the Cullen Fund has turned out to be a dud The purpose of the Fund was always questionable and some of us said so at the time Michael Cullen had the brain fade that gave birth to it. The Fund is nothing more than a tax increase on the current generation so they can part-fund their own NZ Superannuation themselves "“ pay now, receive later style of thing. Nothing wrong with that in principle but the rationale collapses totally as soon as you appreciate that it's politicians rather than you personally in control of this long-term plan. It was always high risk that a future politician couldn't resist getting their sticky fingers into the cookie jar and using the money to build monuments to their own personal agendas "“ roading, cycle tracks, expensive drugs like herceptin, property developments, handouts for local firms "“ all manner of pork barrelling largesse . But the point is the integrity of the investment mandate would be undermined by busy-body politicians interfering with your retirement pre-fund. John Key was the first politician to be tested and he totally flunked once he uttered his desire for 40% to be directed to the NZ economy. Remember Labour's big fund idea of the 1970's that led Muldoon to run the dancing Cossack TV ads that conjured up images of this big fund totally distorting the domestic economy? Well this time the Cossack is John Key! Muldoon would be turning in his grave (an interesting twist). It assumes the fund manager can get market-average returns over the long term. This would make Adrian Orr and his merry band of helpers outstanding in the spectrum of international fund managers, 70% of who fail to make market average returns in any one year, let alone over ten or twenty. With all due respect to Adrian and his Chairman David May of life insurance industry fame, the chances of them being the next Warren Buffet are near zero. And their track record so far confirms my suspicion "“ they haven't even matched the relevant market benchmark for average return, let alone the crazy benchmark they've set themselves, so there is no reason to assume they will. The moral hazard "“ one of the most dangerous aspects of the Cullen Fund was the tendency to suck people in to thinking that the government had everything under control and therefore we as individuals needn't worry. Obviously if you believed the nanny state rhetoric that Cullen et al espoused, then you could get on with your normal lifestyle of "˜spend and speculate' and not bother to put aside serious money for retirement, given our trust in government. Sucker! Government was never going to deliver on this one. Thank goodness it has all collapsed within a couple of years rather than just before you had to rely on it. * Gareth Morgan is the executive director of Gareth Morgan Kiwisaver