Editorial: Cullen Fund there for the long haul

Opinion

The Finance Minister was cautious last week when quizzed about the possible suspension of contributions to the New Zealand Superannuation Fund. The question, he said, had yet to be considered "seriously". That fell well short of the blanket rejection many may think the suggestion warrants. The fund was set up to help future taxpayers meet the cost of the baby-boomers' retirement and designed to operate at arm's length from Governments. A contributions
holiday could be seen as meddling, much like the Prime Minister's stated preference for at least 40 per cent of the fund's investments to be held in New Zealand assets.

The question of suspending payments arises because the public accounts are no longer in surplus, as they were over the five years since the fund was established. The Government will also be mindful that the Cullen Fund, as it is best known, has taken a $5.5 billion hit on its investments over the past 18 months thanks to all-encompassing market turmoil. In the current environment it would seem ill-advised to borrow money to maintain the $2 billion
annual contribution. The fund has lost the last two years' worth of contributions in the downturn.

But it needs to be remembered that these losses exist only on paper. The fund was intended not to be drawn on for at least a decade from now. The losses are the type of hiccup, albeit a large one, that habitually occurs with long-term investments. Indeed, it can be argued quite cogently that now is an especially good time for such funds to invest because assets are cheap and interest rates are low. Certainly, the fund guardians thought as much last December
when they reported that it was "positioned to withstand volatility and benefit from the investment opportunities that arise".

Equally, it is misleading to single out the fund when talking of borrowing. It is simply part of the Government's spending programme, some of which will be funded by tax and some by resort to the debt market. It would be just as rational to talk of tax cuts, or health or education for that matter, being funded by borrowing. Similarly, a contributions holiday would not be a true holiday. As the law stands, any reduction of the amount paid into it now would
have to be offset by higher future contributions to compensate. This would create its own set of problems.

It is important to stress that this whole question is about payments into the fund, not payments out. It is highly irresponsible of the Labour Party leader to suggest that the level of pensions might be at risk, now or in the future. This fund, as Phil Goff well knows, will do no more than partially fund future pensions when the bulk of the baby-boom moves into retirement. The greater part of the payments then, as now, will come from each year's taxation. And
the terms of payment will be set, then as now, by voters, not by the success or otherwise of the fund.

Baby-boomers will be voting in retirement with sufficient numbers to preserve their pensions regardless of whether the fund has prospered. If it does, future taxpayers will thank them for it, but if it has been sustained by contributions with borrowed money, it might be of no help.

The Government needs to estimate whether the accumulated debt from borrowing to make a contribution this year would nullify the fund's likely earnings on the borrowed sum over the next decade.

This is not a time to lose sight of the big picture. The Cullen Fund is a long-term investor whose strengths are its liquidity, diversification and freedom from Government interference. A $2 billion annual contribution may be dwarfed by the billions the Government contemplates borrowing to help carry the economy through the global recession. But it is a question that must be resolved by a calm assessment of the fund's value, not by fear of irresponsible politics.