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.

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12 Comments & Questions

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wasn't Winston Peters support for the Cullen fund conditional on it being able to be split back to individuals??

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Bear in mind that the Fund was set up to partially pre-fund NZ Superannuation, a basic level of national pension that is a future liability of the Government. If it's going to be wound up, the assets should be used to reduce the amount of borrowing the Government is going to undertake in the next few years to get us through the recession. Put the money aside in good years and use it to fund the budget deficit in bad years. Forget about how the Fund has performed. It's old news about which we can do nothing. The fact that losses have not been crystalised is IRRELEVANT.

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About what you would expect of Cullen and Co. First they set it up so it can't be pulled apart then they invest it in every losing venture imaginable. Though no doubt in traditional Labour style they got some nice lunches from the shysters who sold them these investments

In my view make Kiwisaver complusory(bet Key and them will before they finish) but keep the losing Cullen fund to fund the pensions of those who either won't have enough in their Kiwisaver accounts by retirement due to age or incompetance(the latter being most of Cullen's supporters). In return for the complusory aspect cut tax rates to compensate.

In in ten years or so commence a means testing regime so the kiwi saver benefit kicks in. Slowly at first then more and more over time.

Mightn't be popular but only way around it I can see

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Once again, the KISS principle should apply. Now is the time to be agressively buying in order to mitigate recent unrealised losses.

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Morgan of course has a vested interest in seeing it split and re-distributed back to Kiwisaver as he is a fund provider.

It is nonsense to split it $3000 per person for the reasons claimed above. All it would mean is a wealth transfer from those who pay tax to those who don't contribute. And that is not what super savings is about.

I am not a Cullen supporter but my preference is just to leave the $12 billion in and use the money as and when required for Super in the future.

To break the fund would further dent NZers faith that super means anything more than a slush fund for increased taxes and government intervention.

And does it matter that returns are so low at present int hemarket, super is a marathon, not a sprint, all this panic about low returns is contraty to the long term savings objectives that people should be encourgaed to have.

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Get off the grass Mr Morgan! When we hit a down cycle like this self proclaimed prophets like you have a field day. And dismantling funds set up by previous governments seems to be fair game.
People like Morgan abuse the privilige cheapjack journalism accords him - so he produces standard bean counter projections that assume the new financial order will be a continuation of what has been. They do it in financial matters, defence alliances and trading treaties - and they are usually shown to be wrong!
I say treat these people with extreme sceptisism - we cannot change the world order but we can be clever and 'roll with the punches' to make the best of what we have.
But we don't need this 'clever dick' iconoclysm that might get media attention but doesn't help the future.

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The whole fund is smoke and mirrors ,its just drowning Labour Hacks clutching at straws who are trying to sound important or in this instance JK has run rings around Goff and whats his name C -liffe they have to justify their very existence for the next at least 15 more years telling porkies.

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If a worker cannot afford to put aside 4% or 8% of their salary something is wrong - they're obviously spending far too much and need to tighten their belts.

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I have to agree with Brendan. A 4% compulsory savings amount is quite minimal. Borrowing for the NZS Fund, or keeping taxes high to have 'surplus to pay for' the NZS Fund, is rather silly. A payout from the fund's winding up sounds attractive, with the introduction of compulsory KiwiSaver, but why not just use the money to pay down the debt? That would provide a longer-term solution, which could free up cash against borrowing requirements in the future, and which would work for the benefit of all New Zealanders. It would reduce the issues from the fund holding illiquid assets and would allow the money to be brought back to New Zealand, slowly. If we don't want to do that, for currency issues, we could use it to fund the foreign portion of portfolios. It would also reduce the equity issue, as people already pay tax, and would avoid some of the moral hazard that has been created.

If we want to maintain NZ Super as it is, fine, but creating a fund which makes people feel 'more secure' seems to be creating a culture which has people not putting enough into KiwiSaver. The NZS Fund contribution worked out to about $580 per annum per capita ($2.5bn / 4.3m people). 4% into a KiwiSaver would save more than this and provide a much better way for people to learn about saving. It would also reduce, again, the visible hand of the State. That we have a social protection system is good, that we seem to want to take no responsibility isn't. Just let people handle their own affairs and reduce the national debt that we're all stuck with.

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Morgan as a KS provider has a vested interest. Charging 100bp pa morgan is one of the higher charging KS funds - as such he should not be making such comments; but if he insists he should place a cavit on his commets. I have concerns the average falls for morgans advise too easly without knowing the full story!

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Well some whiners always see the glass half empty,Remember there is nothing in the super advice for Morgan,A MAN WHO IN THE LAST FEW YEARS HAS GIVEN AWAY 47 million dollars of his own money TO DESERVING PEOPLE .Beat that whiners.

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I reckon I could afford to give away 47 million at regular intervals, IF I was blatantly over-charging Joe Public for their KiwiSaver and spreading rubbish without disclosing to people that I had a vested interest in the outcome...

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