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The Actuary The magazine of the Institute & Faculty of Actuaries

The New Zealand superannuation fund

LIKE THAT OF MANY COUNTRIES, New Zealand’s population
is ageing. The proportion aged over 65 has
increased from 9% in 1951 to 12% in 2001 and it
is projected to increase to 26% by 2050, during
which time the working-age population will
decline as a proportion of the total population from
65% to 59%.
While this trend is accentuated by the passage of the
‘baby boom’ generation, there appears to be a permanent
change in the age profile caused by increasing
longevity, declining fertility, and later childbearing.
This change has direct implications for the cost of
New Zealand superannuation, which is a noncontributory
universal wage-indexed benefit paid to
all citizens over the age of 65. New Zealand superannuation
is set to increase from its current level of
4% of GDP to 9% of GDP by 2050. This higher level is
comparable to the existing costs of public pensions in
several European countries.
Smoothing the transition
Seeking to help ensure the continuation of the existing
universal benefit structure, the New Zealand government
has decided to establish the New Zealand
Superannuation Fund. The fund’s purpose is to
smooth the transition to the permanently higher
long-term cost of New Zealand superannuation.
The Finance and Expenditure Select Committee of
parliament is currently considering the New Zealand
Superannuation Bill. The analysis below is based on
this Bill. The committee may well recommend
changes before it is finally passed into law.
Comparison with Irish Stability Fund
International experience, particularly from Ireland
and Canada, has been drawn upon extensively in
developing the details of the legislation for the New
Zealand Superannuation Fund. Like the Irish Stability
Fund (outlined in the February 2001 issue of The Actuary),
the New Zealand Superannuation Fund would be
managed on a commercial basis by an independent
board. However, there are two key differences.
First, the Irish legislation is not specific
about what that fund is to be
used for once drawdowns are allowed
after 2025, except that the amount
cannot exceed the total outlay on
social welfare pensions and public
service pensions. By contrast, the
New Zealand Superannuation Fund
can only be applied to paying the
New Zealand superannuation benefits
specified in the legislation.
Second, the rate of contribution to the Irish Fund is
set in the legislation at 1% of GNP, and the Irish minister
for finance will determine the rate of drawdowns
after 2025. In the case of the New Zealand Superannuation
Fund, the rate of capital contribution from
the Crown will be calculated annually on the basis of
a rolling 40-year moving average of the future cost of
New Zealand superannuation. Based on current projections,
this would start at about 2% of GDP and
wind down to zero by the late 2020s. This same calculation
rule provides the basis for drawdowns from
the fund after that time, rather than leaving discretion
for disbursement of such a large fund with the minister
of the day.
The effect of this formulaic approach to fund contributions
is that the combined cost of current New
Zealand superannuation payments and capital contributions/
drawdowns rises steadily from about 6% of
GDP (4% current cost plus 2% capital contribution) to
the long-term average cost of 9% of GDP by the end
of this century when the fund converges toward zero.
Using a formula based on future expected costs also
means that if elements of the entitlement policy
change (for example, the age of eligibility or the payment
rate), the required capital contribution would
adjust accordingly.
Fund management
An element crucial to the success of this policy will be
the appointment of an independent and wellqualified
board to manage the fund. Drawing on the
legislation for the Canadian pension plan investment
board, New Zealand’s minister of finance will be
required to appoint qualified members from a shortlist
prepared by a separate nominating committee.
This is a departure from the practice, in both Canada
and New Zealand, for other public board appointments,
in which the government is not normally limited
to a choice from an independently prepared
shortlist of qualified candidates.
Investment strategy
Equally important is the investment mandate under
which the fund’s board must operate. The board
would be required to ‘invest the fund on a prudent,
commercial basis and, in doing so, must manage and
administer the fund in a manner consistent with bestpractice
portfolio management; and maximising
return without undue risk to the fund as a whole; and
avoiding prejudice to New Zealand’s reputation as a
responsible member of the world community.’
Clear parallels can be seen with the mandates of
other independently managed public funds. A distinguishing feature is that fund investments must avoid
prejudice to New Zealand’s reputation. This provision
was incorporated to reflect the fact that the Crown
ultimately owns the fund, and so the actions of the
board would reflect on the Crown. The alternative of
requiring the government of the day to determine, or
to approve, the investment policy was considered to
be too open to political influence.
Ethical considerations
The ‘avoiding prejudice’ provision implicitly requires
the board to take account of ethical considerations in
its investment decisions. Drawing on the recent
changes to United Kingdom pensions legislation, the
New Zealand legislation would also require the board
to report its policies regarding ethical investment in
its statement of investment policies, standards, and
There are only two significant constraints on the
investment of the fund included in the legislation.
First, as for the Irish Stability Fund and the Canada
Pension Plan, no controlling interests are allowed.
This constraint will not have a significant impact in
the normal course of events because investment funds
usually avoid taking controlling interests in entities
anyway. However, it is important to be clear about it
in this case because the Crown, as ultimate owner of
the fund, does not want to become the owner of businesses
simply because of the decisions of an independent
board. Further, it raises a host of issues about
government guarantees and public accountability of
government-controlled entities that are best not
The second constraint is that, except with the
approval of the minister of finance, the fund would
not be permitted to borrow, or hold any financial
instrument that places a liability or contingent liability
on the fund or on the Crown. Unlike the Irish
fund, the New Zealand Superannuation Fund would
not be precluded from investing in its government’s
securities, if the board chose independently to do so.
Performance review
In addition to the auditor-general’s office exercising
its full auditing mandate over the fund, a similar
approach has been adopted as for the Canada
Pension Plan of requiring periodic reviews of the
performance and operations of the board by an
independent person.
Next steps
New Zealand has a unicameral system of government,
so the next step will be for the legislation to be
reported back to parliament and a vote taken on its
passage into law. After that, a nominating committee
would be appointed to prepare the shortlist of qualified
candidates for appointment to the board. Once
the board is appointed, it would be able to establish its
investment strategy and its fund management infrastructure.
Contributions to the fund are intended to
be put aside from 1 July 2001 and will be held by the
Treasury until the board is ready to take over and
implement its investment strategy.