by Rob Hosking
As recently as December the government was projecting a 6.8% after tax return for the fund.
However buried away in the Budget tables is a scaling back to 6.2%. That means the taxpayer has to stump up an extra $150 million this year alone.
The move is the latest in a gradual downgrading of the fund’s expected pay-outs – the initial estimate when the fund was set up in 2001 was that it would make a return of 9% before tax, or about 7-7.5% after tax, depending on the type of investments made.
This time though the change is driven not by greater pessimism from the Guardians of the fund about the likely returns over the fund’s life.
Rather it is the Treasury doing what the Treasury is supposed to do – and playing it very cautiously.
Forecasts for the returns are now being done within the Treasury – and are part of a more focussed approach on the likely returns of the government’s financial portfolio. This does not only include the NZSF – although that is the biggest item – but also the Accident Compensation scheme and the Earthquake Commission.
Until now the Guardians of the fund have made the calculation, says the Guardian’s chief executive Paul Costello.
“We’re required to predict the return for the next annual period, as part of our statement of intent,” he said. “But that’s not much use to the Treasury, from a long term point of view. So they’ve developed their own assumptions.”
Treasury official Brian McCulloch says the change in approach primarily affects the NZSF because the government has to make an annual contribution to the fund. That does not happen with the other financial assets – unless something goes radically wrong.
The change means, “we are getting a more consistent view than we have got before,” he says.
The change is mostly due to changes in GDP, rather than in the markets.
“We didn’t change our assessment of the equity risk premium, and we didn’t change assessment of long term bond rate.”
Rob Hosking is a Wellington-based freelance writer specialising in political, economic and IT related issues.
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