On the Money: Canny investors will follow NZ Super managers' market lead

Friday 30th August 2002

The government is grinding closer toward making the Cullen superannuation fund a reality by naming the scheme's guardians. The next step will be appointment of fund managers.

There is already $805 million of borrowed money sitting in the Treasury's debt management office's kitty to invest. More will follow.

About $270 million of the cash pile is earmarked as an early Christmas present for the local sharemarket.

Going forward, the Cullen fund promises to pump up a number of Stock Exchange listings on a regular demand basis.

Stock-pickers should take notice. Although a split-up of the initial $270 million may not represent much money directed at individual stocks, it nonetheless signals sustained future demand for such listings as have sufficient liquidity to appear on fund manager radar screens.

Once the New Zealand equities manager is named, it would be a smart move to analyse the shareholdings in its existing fund to work out where dollars will go and demand accordingly increase.

Thereafter one could just ride on the coat-tails of the manager's shopping list and let the long-suffering taxpayer do the rest.

More generally, the Cullen fund seems to have been accepted as a fact of life, even though it is expected to produce only one dollar in 10 of future NZ Superannuation claims and therefore cannot be regarded as a serious answer in its own right as to how baby boomer wrinklies are going to make ends meet.

The general election lacked sufficient attention to superannuation policy.

Instead sideline issues dominated, which may explain why the importance of superannuation did not fire popular imagination or spur those with a professional interest in the matter to demand that political parties stump up with something sensible to say.

Debate boiled down politically to whether parties were for or against the Cullen super fund. The bigger picture for retirement funding was neglected.

The need for proper discussion has not diminished. Retirement provision can be analysed into a three-tiered question. To what degree and in what combination should superannuation be paid out of current taxation, accumulated through workplace schemes or saved for out of private investment?

Various countries have reached differing conclusions about the emphasis to be placed on these three sources of superannuation.

Two tiers - current taxation and workplace schemes - are collectivist, whereas the third - private provision - is individualist.

Over 1999-2002, the Labour-Alliance government tackled two of these tiers by legislating for the collectivist Cullen fund and effectively regulating against individual provision through bringing in a 39% marginal tax rate for $60,000-plus earners.

Investment advisers and fund managers feeling the pinch of reduced investment inflows can look to the higher marginal tax rate as one reason, notwithstanding the salary sacrifice loophole.

The Labour-United First-Jim Anderton's Progressive Coalition coalition has further implemented the Cullen fund and signalled a revision of the other collectivist approach - workplace superannuation - by adjustment of savings tax rates according to contributor earnings.

Individualism seems targeted for the imposition of the so-called risk-free rate-of-return tax.

The government, which styles itself as social democratic, is supportive of collectivism and at best indifferent, if not hostile, to individualism.

Almost no public debate of substance has emerged over the merits of such a stance for superannuation, particularly from among investment advisers.

Investment advisers need to enter public debate over superannuation policy. Political parties cannot be relied upon to get policy right out of their own resources.

Fund managers may have been silenced by the prospect of working for the Cullen fund. Investment advisers, who work at the coalface of helping New Zealanders plan for comfortable retirement, must make their expertise heard.

If the Cullen fund is insufficient to guarantee a liveable pension, if workplace superannuation is still in a fragmented state and if private savings have been attacked through tax hikes, can we be sure the superannuation question has been answered adequately?

What roles have potential overlay issues such as incentives, regulation and compulsory saving to play in bringing more predictability to retirement outcomes?

And outside these superannuation-specific matters, where is sustainable economic growth going to come from as the ultimate origin of savings and investment?

Dr Cullen has already conceded Reserve Bank economic growth projections of 2.5-3.5% under the next three years of the Labour/United First/Progressive Coalition Parliament fall below the much-vaunted 4% needed consistently to restore New Zealand to the upper half of OECD economies.

His eponymous fund - paid for by taxes and borrowing and projected to hit a $2 billion per annum levy on taxpayers - will not contribute to achieving needed growth. The fund is an economic growth problem masquerading as a distant superannuation solution.

In the meantime, savvy punters will make hay while the sun shines from its effect on our ailing sharemarket.

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