US expert spells out prefunding problems

A leading United States superannuation expert says the Government's plans to prefund New Zealand Superannuation are commendable, however he says there are two major problems.

Robert Pozen, who is vice-chairman at Fidelity Investments and has been appointed to a Presidental Commission on Social Welfare (superannuation), says the two big problems with the prefunding proposal are the clause relating to ethical investments and New Zealand's peculiar tax system.

Pozen says the clause in the bill designed to appease the Green party is meaningless and "is a problem waiting to happen."

The clause "has the potential for a lot of mischief," he says.

The reasoning behind this is that it is very wishy washy and doesn't spell out any ethical, or socially responsible mandate.

"You will find that managers have an excuse for not having good returns."

Pozen is no fan of SRI investing and believes managers should be able to invest in whatever assets or companies to get the best returns possible.

He says the fund flows into these funds is being "grossly over-estimated" by some people.

The second problem is that the fund's Guardians will be forced towards investing it in passive funds because of their tax-favoured status.

Pozen says New Zealand's tax system with regards to capital gains is "extremely unusual."

"New Zealand is the only country that I know of in the developed world which has this distinction between active and passive."

Overall, though Pozen says prefunding is commendable.