Budget 09: Super fund decision will have huge impact

While the Super Fund was well known to be on Bill English's hitlist for this year's Budget, the extent of his attack on the $12.5 billion investment fund has come as a surprise.

The Cullen Fund was set up in 2003 as a way of pre-funding the state superannuation needs of the so-called "baby boomers" who are about to start retiring from the workforce in increasingly large numbers.

While many predicted the dire state of the Government's books would mean this year's $2.2 billion super fund would be put off, few had predicted English to announce a complete stop to contributions.

Just $250 million will be put into the fund this year - largely as part of the election year promise to have more of it invested in New Zealand. The fund is not being shut down, it will continue managing its investments, but it will not grow at anything like the scale its founders or current managers envisaged.

Annual super fund contributions will not now happen again until the Government's books are back in surplus - a feat not expected for at least 11 years.

The fund has been a source of some controversy over the past year, with its global investments taking a battering on world stock markets.

The value of its investments rose 6.74 per cent in April, on the back of a 1.12 per cent gain in March. Despite these recent gains the fund is still down more than 25 per cent for the year to April.

Government says that continuing to make automatic contributions to the super fund would have added $19.5 billion to debt over the next 11 years. When and if payments into the fund resume, Government will have to pay $2.5bn a year, rather than the annual $2.2bn that has been paid in up till now.

While the decision to stop paying into the fund means no immediate change in actual superannuation entitlements, political opponents are already pointing out that the Government is making commitments to the elderly, while leaving the question of how they will be paid for to its successors.

It reached a peak of $14.5 billion in August last year in the wake of the economic crisis. Its worst fall was in October when it plummeted 13.51 per cent in one month, wiping more than $2 billion off the fund.

It now has an average annual return of 3.26 per cent, significantly less than the risk-free rate of 6.73 per cent that it is measured against.

Under the original scheme, the fund was expected to be worth around $109 billion by 2025, when payments were expected to stop, and withdrawals start.