Suspending NZ Super Fund contributions increases burden: Mercer

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Plans to suspend contributions to the New Zealand Superannuation Fund until 2021, announced in today's Budget, are a short-term action and could bring long-term pain, according to consulting, outsourcing and investments firm, Mercer.

Thursday, May 28th 2009, 4:49PM

Mercer's New Zealand Business Leader, Martin Lewington, said, "While we recognise the Government is under significant budgetary strain, like many countries around the world, we're concerned suspending contributions to the Fund - even on a temporary basis - may put future Governments and generations under significant pressure to change NZ Super.

"Reducing funding now without any other significant reform around retirement saving policy, such as increasing the NZ Super entitlement age or providing alternative retirement savings mechanisms, will only add to the financial pressure on the Fund in the future," he said.

The Fund has been set up as a mechanism to pre fund or provision for a portion of the NZ Super costs of New Zealand's ageing population. Contributions were planned for investment over a very long time frame, over which returns on risky assets were expected to exceed returns on New Zealand Government debt (being the cost to the Government of borrowing to fund its NZ Super obligations).  Government contributions were previously running at $2.4 billion annually.  The New Zealand Government could have used the contributions to clear its debts, but decided to contribute to the Super Fund of which capital is expected to be drawn down commencing 2031.

"Suspending contributions to the fund in the short-term obviously means less future accumulation.  This may well lead to future Governments needing to make larger contributions to recover this suspension or ultimately bear higher NZ Super costs due to the shortfall in draw-downs from the Fund," said Lewington.

"The Government could save money through the contributions' suspension if its debt funding costs exceed the return on the Fund's assets. We believe this is unlikely over the next 20-30 years but is possible over shorter timeframes, as has been the case recently.

"As such the suspension is not only likely to increase future contribution requirements due to lost investment earnings, but also to raise the risk of inadequate returns on catch-up contributions due to the shorter investment timeframe," he said.

"NZ Super represents a known fixed cost, which the Government will have to meet in future years. While the Government has produced a budget with a $3 billion increase in core spending in a number of areas to stimulate the economy, which we support in principle, we do not believe this should be to the detriment of the NZ Super Fund.  The long term risks cannot be ignored and the potential consequences of suspended funding are significant if no other action is taken.

"We agree with the Government that the current recession will pass, but our population - and our workforce - will continue to age and the long term risks of this cannot be ignored. The potential consequences of reduced funding to NZ Super Fund could be significant at a national and individual level," Lewington said.

Apart form the suspension of contributions to the NZ Super Fund, the Government has not formalised any policy around asset allocation within the NZ Super Fund, however it has indicated they would like 40 per cent of its assets invested in New Zealand.

Mercer does a lot of work globally with sovereign wealth funds such as the New Zealand Super Fund, many of which exist for the purpose of providing public pensions where countries have ageing populations and  Lewington noted there are risks and benefits in mandating these funds to invest domestically.

"Overall, we believe our ageing population and the budget strain these demographic changes bring are some of the biggest challenges our current, and future, governments face.  We encourage the Government, and business, to look at a more holistic approach to these challenges specifically with the aim being to secure an adequate retirement income for all New Zealanders, which may involve multiple solutions that could increase private provisioning for retirement.

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