Cullen unveils $240 billion super scheme

By VERNON SMALL and JOHN ARMSTRONG

New Zealand First has thrown its weight behind the Government's giant superannuation fund, ensuring it will be enshrined in law and therefore harder to dismantle.

Finance Minister Michael Cullen unveiled details of the fund yesterday, showing the Government would set aside $25 billion over the next 10 years to help to meet the burgeoning cost of pensions.

The fund is expected to peak at $240 billion in 50 years.

National said it had an "open mind" on the proposal, but attacked the fund's credibility. It renewed calls for an independent panel to assess the scheme's long-term viability.

Labour and the Alliance needed the backing of at least one other party to pass the fund into law.

If it had failed to get that support, the Coalition had intended to set the scheme up anyway and campaign on the issue at the next election.

The Greens are still considering their position on the pre-funding idea, but are in favour of state-funded universal pensions paid at the present rate. They are seeking assurances on the fund's approach to so-called ethical investing and what proportion is invested overseas.

Surprisingly, Act's finance spokesman, Rodney Hide, was fairly positive about the plan. He said Act had always taken a long-term view of pension costs and the scheme would smooth those over time.

But the biggest boost to the scheme's long-term survival was a pledge from NZ First leader Winston Peters. A fund with tamper-proof individual accounts is his preferred position, but he stressed: "We will support measures that ensure that an independently managed fund operated in accordance with sound commercial practice is available to meet superannuation needs of present and future retirees."

NZ First is thus likely to support the scheme, more so if it leaves open the possibility of a later switch to personalised accounts from the single pooled account outlined yesterday.

Once it is confirmed that Dr Cullen has the numbers, he will introduce legislation this year to set up the fund.

That will confirm existing entitlements to state superannuation at age 65, and set the married couple rate at no less than 65 per cent of the average weekly wage. Payments will not be means or asset-tested.

The only retirees whose pension levels will change are gay couples. To comply with the Bill of Rights, their entitlement is likely to fall from the single sharing rate of $208.20 a week in the hand to the married-person rate of $173.50.

How much the Government puts into the fund will depend on the amount needed over the next 40 years.

At present, state pensions cost $4.25 billion a year, less than 5 per cent of gross domestic product.

This is forecast to rise to 9 per cent of GDP by 2050.

The last Budget set aside an extra $600 million for the fund next year and $1.2 billion and $1.8 billion in the following two years.

After that transition period, it is estimated the fund would need an injection of 1.75 per cent of GDP each year - equal to about $1.8 billion in today's terms - although that could rise or fall depending on the state of the economy.

The fund is assumed to earn 9 per cent a year pretax on its investments.

The amount needed would slowly decline to zero by 2025. But the fund would continue to grow from its investments to reach more than $240 billion in nominal terms.

In the long run, the fund would dwindle as more and more was drawn off to help pay for baby-boomers' pensions.

National appears opposed to the scheme but it is wary of a political backlash if it is seen to be frustrating a genuine attempt to find a sustainable way of paying the growing pension bill.