by Rob Hosking
Treasury officials warned ministers that diversification of the Government Superannuation Fund (GSF) would create political flak when the fund lost money – and that there was a specific risk if losses occurred immediately after diversification.
Papers obtained under the Official Information Act show that although the fund’s diversification was seen as a necessary move. Officials appear to have been extraordinarily prescient about the fall-out if, as has happened, the fund lost money immediately.
The Treasury recommended to the National government of the late 1990s that the GSF, which had hitherto invested in New Zealand government, state owned enterprises and Crown entity debt instruments, take a more conventional asset allocation.
A 1997 study showed that diversifying the fund would save the taxpayer about $1.1 billion – although a time frame of that saving is not provided.
"Of course, a riskier investment portfolio may lose value in some years," a Cabinet paper to the then new, Labour-led government in early 2000 stated.
"If that happens early on, before a track record of higher returns develops, pressure may build to reduce the independence of the fund."
That pressure has been put on the government of late after the fund starting diversifying in October 2001. In its first year GSF has posted a $242 million unrealised loss on the international equities part of its portfolio.
Subsequent losses have led to calls from Green co-leader Rod Donald to invest the fund in New Zealand, and Act Finance spokesman Rodney Hide has also used the losses as a stick to beat Finance Minister Michael Cullen’s pre-funded superannuation scheme.
Officials warned the government that if they succumbed to that pressure, then, at best, there would be lower returns from the fund than would otherwise have been the case, thus increasing the taxpayer’s costs.
"Pressure may mount to reduce the independence of the fund, or to switch back to the original conservative portfolio. That will lock in losses with no prospect of future equity gains.
"In addition, overseas experience indicates that reducing independence is likely to reduce expected returns as non-financial criteria become increasingly important."
Officials advised ministers to slowly diversify the fund, thus minimising the risk of early losses. The GSF’s managers have taken that approach, but, as the diversification occurred during the longest international bear market for a generation, this has not prevented the fund losing money.
For more on how the fund is invested go to
www.supertalk.co.nz. SuperTalk is a website run by Good Returns and AMP and devoted to superannuation issues.Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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