NZ Super Fund's Adrian Orr says future generations would benefit from a resumption of govt contributions & end to taxing the Fund

NZ Super Fund's Adrian Orr says future generations would benefit from a resumption of govt contributions & end to taxing the Fund

By Gareth Vaughan

On top of resuming contributions to the New Zealand Superannuation Fund, the Government could also stop taxing it, says NZ Super Fund CEO Adrian Orr, noting future generations would benefit from these moves.

In a Double Shot interview with interest.co.nz Orr said he also sees opportunities in KiwiSaver that would undercut existing providers, confirmed the Super Fund is interested in investing in Auckland housing, sees investment opportunities in struggling Europe, and won't be reinstating Milford Asset Management as one of the Super Fund's investment managers anytime soon.

Asked whether instead of resuming contributions the Government should stop taxing the Super Fund, Orr said it could do both.

"I think they could do both. And I say that very optimistically in the sense that all current (political) parties agree that funding should resume. They disagree on timing, or how or when it should resume. The incumbent government is talking about a particular net debt level they're targeting, others are talking about an operating surplus, and so on and so forth," Orr said.

"So everyone agrees in the big picture, which is it is important to pre-fund for this rising known future (retirement) cost."

"When our funding formula is working as it's supposed to in the legislation, even though we pay tax it is grossed back up with next year's contribution. So if we pay $1 tax we get a $1 extra for the contribution. So in that sense it was a paper go-round. We believe that was put in there primarily to make sure that we weren't used as some sort of tax conduit," said Orr.

"Our challenge now is that (government) funding is not happening and hasn't happened since 2009 meaning the tax doesn't come back to us. It is lost to the fund (but) not lost to the Government. And so that really means the current generation get the use of it, not the future generations that we're saving for."

"That is a choice that's being made but we just have to be very honest about the inter-generational implications of that choice," said Orr.

NZ's biggest taxpayer

The National Party-led government stopped making contributions to the Super Fund in 2009, with the Government having tipped in about $12.34 billion of taxpayers' money to that point. The Government's current plan is to resuming contributing money when government net debt is under 20% of GDP, which is forecast to be in 2020/21. 

However, the Super Fund has also become NZ's biggest payer of income tax, having paid $4.67 billion since inception. (See more on this in Terry Baucher's article here).

Established by the previous Labour Party led government to help meet the rising cost of superannuation payments to retirees, the Super Fund began investing in September 2003 with about $2.4 billion. As of May 31 the fund size was $29.65 billion having returned 17.47% over the past year and 10.30% per annum since inception.

On the Super Fund's website there's an estimate, or opportunity cost as Orr puts it, suggesting the fund's value would've been $47.1 billion as of April 30, $17.8 billion higher than its actual value was at that date, if the government contributions hadn't been stopped. 

Orr said he's unaware of another sovereign wealth fund that pays tax. And here in NZ the Accident Compensation Corporation doesn't pay tax. Asked whether the issues of resuming payments and stopping taxing the Super Fund are raised with Prime Minister John Key and Finance Minister Bill English, Orr said the facts are on the table for all to see.

"The bottom line is the decision has been made and that's where it stands. It's meant to be a temporary halt. (But) it is a long period between funding now," said Orr.

What about KiwiSaver?

Asked whether the Super Fund could launch a KiwiSaver fund, Orr said this was also a decision for the politicians. The Green Party has previously pushed the idea of a public option KiwiSaver fund run by the Guardians of the NZ Superannuation Fund, manager of the Super Fund.

Orr did say, however, he sees opportunities in KiwiSaver.

"The single biggest opportunity I see in the KiwiSaver world is just a simple passive, listed reference portfolio. It could have three shades of grey from conservative through to growth, but it's about getting a benchmark on what is the lowest cost, most efficient access I can get to the economic investments I'm after to achieve my purpose."

Orr points out that as a KiwiSaver investor you are paying for the manager of your fund's "purported skill" as well as the actual investing opportunity.

"So you're paying for not just the vehicle but the driver as well. And it's very hard to separate the performance of the car from the performance of the driver, but you have to pay for the whole package," said Orr.

"So in our fund you can go on our website (and) you will see the reference portfolio and then you can see the actual portfolio from us being active (investors). And so our value add is very transparent."

"We can run the reference portfolio for about 25 basis points, a quarter of 1%. We run the total fund for about 45 basis points, (that's) the cost of being active as well," Orr said.

Based on Financial Markets Authority (FMA) data, across all KiwiSaver funds the average fund fee is 0.97%.

In terms of running a simple passive KiwiSaver portfolio, Orr said this wouldn't have to be done by the Super Fund.

"I'm not sure it would need to be us. It's not rocket science. People should step up and provide those offerings now. I can't see what's holding people back other than it might reduce some incumbent players fees. (But) that (passive portfolio) should be an available option."  

Auckland housing projects need scale

Meanwhile Orr said the Super Fund is interested in investing in much needed Auckland housing developments, if the scale of the projects and returns on investment are right.

"We will invest as much money as the opportunity allows," said Orr. "If we can get access to great opportunities, we especially love them when they have great scale. In the housing area, it might be just in one sub-division, or it could be the same type of sub-division cookie cut across different opportunities."

He said as fund managers rather than builders the Super Fund could provide capital and some capability around overall financial management.

"But we will need to partner with people who have got the access to the underlying land and capability to build these structures. So it's a partnership concept where all the partners know their role."

"We're also happy to co-invest so we're very close with Ngai Tahu, Tainui, a lot of the major iwi who have great capability in this space. Some of them even have access to land. So I'm hopeful, touch wood, that we can really get some of this stuff going and for us it has to be focused on that financial return," said Orr.

Orr wouldn't be drawn on whether any deal may be close to fruition on Auckland housing investment, but said the Super Fund is "permanently in the marketplace" and "permanently looking for opportunities."

Europe, 'where things feel uncomfortable'

Asked where in the world the Super Fund currently sees the better investment opportunities, Orr said generally where things feel most uncomfortable, which at the moment's in Europe.

"Their equity markets have not recovered to any extent relative to the Asian markets, emerging markets, the US market and so we're quite confident being a long-term investor in that area, and we see reasonable value there," said Orr.

He also said he believes global interest rates are well below any sense of long-term fair value.

"So we've been positioned for a long while now, and it's an expensive position to hold, anticipating a rise in global interest rates. And that (a rise) would be a good outcome. People tend to see it as a shock or a risk. But what that would be reflecting is real economic growth returning, average to low inflation returning, it's a good outcome. If you believe 2.25% US 10-year bond yields at the moment, you are forecasting a very sad global economy and that's just not the case."

Milford on the slow road

A mandate held by Milford Asset Management to manage $281 million on behalf of the Super Fund was suspended in April due to an FMA investigation into Milford. The investigation's now finished, with Milford fined $1.5 million, and civil court proceedings filed against Milford fund manager Mark Warminger, which he plans to fight, denying he manipulated the sharemarket. Milford's mandate was suspended until the FMA probe was completed, with the funds now managed internally by the Super Fund.

Asked whether the Super Fund plans to reinstate Milford, Orr was cagey.

"(We) still have a mandate with them but there's no cash in the mailbox. We just want to let some water go under the bridge with them. They have been busy investing significantly in their middle and back office, they've got a new portfolio manager running the part that was looking after our money. We want to see how that shop works together, and it's not going to be soon. We'll chat to them over the course of the next year or so and progress (from there)," said Orr.

*This story was first published in our email for paying subscribers early on Friday morning. See here for more details and how to subscribe.

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13
up

The taxing of the fund whilst at the same time suspending contributions is just another example of this government's slight of hand when it comes to fiscal management. Borrowing from Peter to pay Paul.

So borrow money to begin contributions again. This working generation is expected to pay for the retired of the day, encourage to put away for their own kiwisaver, and then some want even more of others taxes to support the peak, all while trying to pay off student loans, and get into housing that is historical too high compared to wages.

The NZ Super scheme is a pyramid scheme and will eventually fail because
i. Entitlement is universal
ii. You can receive it while still working

Kate , for once I agree with you.

Its wrong on every level to take a % tax out of the growth of the NZ super , when we know that we are facing an actuarial shortfall in the next few years .

Its not just wrong , its plain dumb too .

Apropos of nothing much, except comparisons sometimes prove nothing....

"However, the Super Fund has also become NZ's biggest payer of income tax, having paid $4.67 billion since inception."

That's a total over 14 years.

The four main trading banks in NZ expatriate that amount per year in a one way trip to Australia with the blessing of the government.

10
up

National? Future Generations? Ahahahaha.

14
up

they should never have stopped the contributions they have missed the best investing period in history.
when they did that I knew this national government has no idea about making money or growing investments.
and for those sheeple that say but they would have to borrow the money phwww
first interest rates were nearly zero
second the returns would have been four to six times any interest cover
third the tax paid would have covered any interest and been more than enough to pay back principal
and last it all comes out of the consolidated fund and they borrowed hand over first for a lot of things that has done nothing for the country or economy

Me too. When they did that, I too realised they had no economic or fiscal nous, just neocon ideologues. If any action did not put money into their rich mates' pockets at the expense of the rest, it wasn't considered. Massive transfer of wealth to the wealthy "we want it all, and we want it now".

hindsight is a wonderful thing, what if there was no great return?

I no longer think that investment returns have anything to do with performance, and when people wake up to the situation, returns and capital may disappear.

But still way better than any of the " investments" they did make. Like tax cuts and bailouts. It's all about choices and priorities and the fact is they have no idea on investing in a future.

Without the "Bailouts" or public guarantees of deposits (Not just NZ), then the GFC could have been worse, more companies collapse and therefore the returns on investments non existent.

There is a reason why the peaks/ toughs in the economic cycle are higher/lower and they are happening a lot more - Debt based currency is nearing the end of its lifecycle. Some would argue that the GFC was a sign - the start of the failure, but the Governments around the world using future taxpayers money to keep our living standards of today, has delayed the ponzi debt scheme we have been running for over 40 years.

you didn't need much knowledge back in 2009 all stocks in blue chip companies were at all time lows.
and they have all tripled since then.
I would be very very surprised if keys "blind trust" sat on cash during that period and didn't take advantage of the opportunity like the rest of us.

10
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It seems to be almost a political axiom that center right and right wing governments are almost incapable of dealing with any issue which has a medium to long term impact.

Examples from National:

a) the above - the treatment of the NZ Super Fund
b) increasing the superannuation age
c) anything remotely connected with the impacts of climate change
d) anything remotely connected with constraining the NZ housing market (introduction of capital gains tax etc)
e) anything remotely connected with constraining migration and NZ's population growth in relation to what NZ's sustainable population is
f) etc, etc (feel free to add your own examples)

I guess it comes down to the basic philosophy of the right - the belief that government should be as small as possible and act as little as possible (except when furthering the interests of one's immediate supporters in the here and now). Effectively then you abrogate any responsibility for the future, as mysteriously the 'market' will look after any and all future events in an appropriate manner. The very definition of short termism.

To support the right-wing neoliberal ideology you need to accept a religious-like belief or 'faith' that the market will deliver. What you don't need is rational analysis or critical thought (the natural antithesis of these traits). It's much easier to say 'leave things to the invisible hand of the market' and everything will be solved for us.

It's really just another psychological trick used to placate the masses as you go about ripping them off and enriching yourself. A comforting bed-time story for the modern day masses.

just saw a cartoon on Facebook, if free market corporations were so good why do they need billions in subsidies and tax relief?

link to cartoon please

Can't be free market corporations if they need support from bailouts, subsidies etc......the politicians, and bureaucrats offer all the assistance as they panic over how many people will become unemployed or who will lose their money from share price plunging etc.....they forget there is always a new beginning somewhere else and the fact is their actions of bailing out and using subsidies and tax relief stops many of the new beginnings and advances from happening.

Free-loader corporations would be a better terminology!

Whereas it's entirely rational, it completely stands up to critical thought, no religious-like belief or faith is needed at all and there's so much empirical evidence to support the view that economies managed by Governments deliver better outcomes.

There's hell of a lot more evidence for this, than there is for free markets succeeding in the best interest of the largest amount of people, yes....

Yes... those resource rich socialist paradises like Venezuela where people are forced into using pet medicine and have run out of beer. The government couldn't organise a p*ss-up in a brewery...

Puts high Auckland house prices into perspective! I think I'll take the free market thanks.

"Faced with the disappearance of prednisone and CellCept, the drugs he needs to take every day to keep his immune system from attacking his kidney as a foreign object, Blanco had to resort to taking veterinary versions designed for pets.

"It's a bit humiliating," he said as he brandished a bright pink box of prednisone with a picture of a dog on it, which costs 90 times more than the human version because it does not benefit from government price controls."

http://news.yahoo.com/venezuela-patients-resort-pet-medications-05154459...

"Cerveceria Polar, which distributes 80% of Venezuela’s beer, says the lack of barley, hops and other ingredients has forced the shutdown. Other beverages like milk and bottled water have been in short supply for months, but the lack of beer is angering some Venezuelans even more, according to merchants."

http://time.com/3989831/venezuela-beer/

And meanwhile the free market can organise a brew up in a p*ssery...

"Clean Water Services, an Oregon company that cleans up local effluent, has proudly applied to the local authorities to be allowed to process the water into beer."

http://www.thegrocer.co.uk/opinion/bogof/oregon-sewage-treatment-company...

"...If you believe 2.25% US 10-year bond yields at the moment, you are forecasting a very sad global economy and that's just not the case."

I wouldn't bet the house on it.

Berkshire Hathaway announced (a 10% decline) $2,367 (Adjusted) EPS, missing estimates of $3,038 by 22.09% - the biggest disappointment since Nov 2008... Read more

All savings should be free of taxes, not just cozy monopolies like Funds. And borrowing to save is an oxymoron.