When we created the New Zealand Superannuation Fund, following the Labour Government coming into power in 1999, the concept was fairly simple: set aside surpluses from the “golden years” of the next decade or so and invest them efficiently so that funds are available to ease the budget adjustment a couple of decades later as fiscal pressures from population ageing and other factors rapidly started to bite.
It was clear then that, when withdrawals from the Fund were expected to commence in the mid-2020s, the Fund with its compounded returns would comprise a very large portfolio of financial assets. Theoretically, even if withdrawals were then made at the maximum permitted by the legislation, the Fund was not projected to “mature” (in the sense of reaching its maximum size as a % of GDP) until the late 2030s. And, under more recent projections (that indicate a less abrupt transition to a lower ongoing cost of New Zealand Superannuation), the Fund is now not expected to mature until the 2070s.
However, how the Fund was “meant” to operate is one thing. How the politics of it will actually play out over such a long time period, and with so many tempting liquifiable financial resources holed up, might be quite different.
Here are four possible political scenarios:
- Golden Goose: It might be that a large fund of relatively fungible financial resources owned by the Crown becomes an irresistibly easy solution to financing competing Budget bids, especially if fiscal constraints harden. A majority Government can change the legislation to enable the fund to be drawn on at will, or to use the Fund for new public purposes.
- White Elephant: While it might be tempting to “raid” the Fund as it grows (see “Golden Goose”), its financial transparency means that it would be a public process that would be easy to challenge by opposing political interests (“putting pensioners livelihoods at risk”, etc.). This political risk might lead politicians to leave the Fund to continue to accumulate, and to fail to put it to its intended use when the fiscal pressures do start to bite. Another “white elephant” scenario could develop if the Government failed to revisit the purpose of the Fund if (or when) the fiscal pressures the Fund was designed to insulate the Crown against were to become less severe, to the extent of allowing only a low level of ongoing capital withdrawals by the Crown.
- Stalking Horse: While not directly “raiding” the Fund, there is potential for the Fund’s objectives and investment strategy to be diverted from maximising risk-adjusted returns on a commercial basis, in order to meet other political objectives, but without the transparency of going through the Budget process. Favouring particular industry sectors, or even particular companies or other interests, are obvious examples. Harnessing the Fund to pursue more pressing financial priorities in the economy is not necessarily a poor outcome, so long as it is done explicitly and transparently. Ireland’s National Pensions Reserve Fund, which was originally set up in 2001 on a similar basis to the New Zealand Superannuation Fund (see my article in The Actuary), was called on in 2009 to support the Irish financial sector following the Global Financial Crisis and then, in 2014, it was disestablished altogether, with its assets being taken over by the Ireland Strategic Investment Fund, which has a dual mandate to generate investment returns and to support economic activity and employment in Ireland.
- Flying Pig: Of course, things could possibly just all turn out according to the theory and the original projections.
Time will tell.