Breaking the Cullen Fund not so simple
Gareth Morgan’s call for the New Zealand Superannuation Fund to be shut down is a good idea in theory but a fiendishly difficult one in practice. That's because former finance minister Michael Cullen built the thing so it couldn't be torn apart.
Mr Morgan says that in the wake of National’s decision to suspend contributions, the New Zealand Superannuation Fund should be shut down and the current $12.5 billion under management be given back to the public in the form of KiwiSaver contributions.
The idea is appealing because all the fund has really done in its short existence is export capital and expose New Zealand savings to increased economic and financial risks.
At the same time the fund has simply expanded the myth that the government is saving for our retirement, creating a moral hazard whereby people feel more relaxed about their future.
However, suspending contributions is one thing, shutting the fund down is another altogether.
To date the Cullen Fund has been an asset acquirer. Virtually all attention is focused on the buy side.
As a known and committed buyer the fund has paid top dollar for many of its investments.
To liquidate now would simply crystalise the losses marked over the last couple of years.
The Cullen Fund has also has built up big stakes in illiquid assets such as forestry, infrastructure and private equity. Some of these assets you cant even ring up a broker to get rid of them.
You could create units in these funds but they might not match the risk profile of KiwiSavers. The Cullen Fund doesn’t follow the same guidelines as KiwiSaver as its sole focus is on outperforming the risk-free rate of return by 2.5% over 20 years.
The biggest problem is how the government would distribute the proceeds.
Mr Morgan advocates shifting the $12.5 billion on a pro rata basis, essentially making KiwiSaver compulsory, but there are still major equality issues with this.
What about people who have signed up their children to KiwSaver and others who have paid no tax to support the contributions thus far?
Should they be entitled to any of the Cullen Fund’s assets?
I’d put those eligible for Working for Families in this category too as the handout effectively cancels their tax bill. Then again they are the ones who probably need it most.
Lets say the first step is to make KiwiSaver compulsory. The government could then casually cancel the taxpayer contributions to kiwiSaver and raise the age of retirement close to 70.
By doing that it would sidestep a couple of politically difficult hurdles.
But compulsory super is not popular either, especially in the current economic climate.
People are already taking KiwiSaver holidays. Many can't afford it as it is.
Certainly those in the higher tax bracket are against it, and the only referendum on the issue in recent memory proved that Kiwis don’t want it.
Mr Morgan’s idea might make it more rewarding for people to join KiwiSaver but that might be at the expense of paying off debt or a mortgage, or investing in business or an education.
It would also make means testing of New Zealand Super more likely as the whole point of KiwiSaver’s opt in system would be smashed over night.
Furthermore, National has accepted the Cullen Fund, even though it has just suspended contributions. People have planned for it being part of their long-term plan for retirement.
Former finance minister Michael Cullen set up KiwiSaver and the Super Fund in a way that makes it to make it very difficult to tear apart.
He built it like a Swiss watch and anyone brave enough to tinker with its parts risks destroying the whole thing.
Unfortunately, the horse has already bolted.