By Gareth Vaughan
On top of resuming contributions to the New Zealand Superannuation Fund, the Government could also stop taxing it, says NZ Super Fund CEO Adrian Orr, noting future generations would benefit from these moves.
In a Double Shot interview with interest.co.nz Orr said he also sees opportunities in KiwiSaver that would undercut existing providers, confirmed the Super Fund is interested in investing in Auckland housing, sees investment opportunities in struggling Europe, and won’t be reinstating Milford Asset Management as one of the Super Fund’s investment managers anytime soon.
Asked whether instead of resuming contributions the Government should stop taxing the Super Fund, Orr said it could do both.
“I think they could do both. And I say that very optimistically in the sense that all current (political) parties agree that funding should resume. They disagree on timing, or how or when it should resume. The incumbent government is talking about a particular net debt level they’re targeting, others are talking about an operating surplus, and so on and so forth,” Orr said.
“So everyone agrees in the big picture, which is it is important to pre-fund for this rising known future (retirement) cost.”
“When our funding formula is working as it’s supposed to in the legislation, even though we pay tax it is grossed back up with next year’s contribution. So if we pay $1 tax we get a $1 extra for the contribution. So in that sense it was a paper go-round. We believe that was put in there primarily to make sure that we weren’t used as some sort of tax conduit,” said Orr.
“Our challenge now is that (government) funding is not happening and hasn’t happened since 2009 meaning the tax doesn’t come back to us. It is lost to the fund (but) not lost to the Government. And so that really means the current generation get the use of it, not the future generations that we’re saving for.”
“That is a choice that’s being made but we just have to be very honest about the inter-generational implications of that choice,” said Orr.
NZ’s biggest taxpayer
The National Party-led government stopped making contributions to the Super Fund in 2009, with the Government having tipped in about $12.34 billion of taxpayers’ money to that point. The Government’s current plan is to resuming contributing money when government net debt is under 20% of GDP, which is forecast to be in 2020/21.
However, the Super Fund has also become NZ’s biggest payer of income tax, having paid $4.67 billion since inception. (See more on this in Terry Baucher’s article here).
Established by the previous Labour Party led government to help meet the rising cost of superannuation payments to retirees, the Super Fund began investing in September 2003 with about $2.4 billion. As of May 31 the fund size was $29.65 billion having returned 17.47% over the past year and 10.30% per annum since inception.
On the Super Fund’s website there’s an estimate, or opportunity cost as Orr puts it, suggesting the fund’s value would’ve been $47.1 billion as of April 30, $17.8 billion higher than its actual value was at that date, if the government contributions hadn’t been stopped.
Orr said he’s unaware of another sovereign wealth fund that pays tax. And here in NZ the Accident Compensation Corporation doesn’t pay tax. Asked whether the issues of resuming payments and stopping taxing the Super Fund are raised with Prime Minister John Key and Finance Minister Bill English, Orr said the facts are on the table for all to see.
“The bottom line is the decision has been made and that’s where it stands. It’s meant to be a temporary halt. (But) it is a long period between funding now,” said Orr.
What about KiwiSaver?
Asked whether the Super Fund could launch a KiwiSaver fund, Orr said this was also a decision for the politicians. The Green Party has previously pushed the idea of a public option KiwiSaver fund run by the Guardians of the NZ Superannuation Fund, manager of the Super Fund.
Orr did say, however, he sees opportunities in KiwiSaver.
“The single biggest opportunity I see in the KiwiSaver world is just a simple passive, listed reference portfolio. It could have three shades of grey from conservative through to growth, but it’s about getting a benchmark on what is the lowest cost, most efficient access I can get to the economic investments I’m after to achieve my purpose.”
Orr points out that as a KiwiSaver investor you are paying for the manager of your fund’s “purported skill” as well as the actual investing opportunity.
“So you’re paying for not just the vehicle but the driver as well. And it’s very hard to separate the performance of the car from the performance of the driver, but you have to pay for the whole package,” said Orr.
“So in our fund you can go on our website (and) you will see the reference portfolio and then you can see the actual portfolio from us being active (investors). And so our value add is very transparent.”
“We can run the reference portfolio for about 25 basis points, a quarter of 1%. We run the total fund for about 45 basis points, (that’s) the cost of being active as well,” Orr said.
Based on Financial Markets Authority (FMA) data, across all KiwiSaver funds the average fund fee is 0.97%.
In terms of running a simple passive KiwiSaver portfolio, Orr said this wouldn’t have to be done by the Super Fund.
“I’m not sure it would need to be us. It’s not rocket science. People should step up and provide those offerings now. I can’t see what’s holding people back other than it might reduce some incumbent players fees. (But) that (passive portfolio) should be an available option.”
Auckland housing projects need scale
Meanwhile Orr said the Super Fund is interested in investing in much needed Auckland housing developments, if the scale of the projects and returns on investment are right.
“We will invest as much money as the opportunity allows,” said Orr. “If we can get access to great opportunities, we especially love them when they have great scale. In the housing area, it might be just in one sub-division, or it could be the same type of sub-division cookie cut across different opportunities.”
He said as fund managers rather than builders the Super Fund could provide capital and some capability around overall financial management.
“But we will need to partner with people who have got the access to the underlying land and capability to build these structures. So it’s a partnership concept where all the partners know their role.”
“We’re also happy to co-invest so we’re very close with Ngai Tahu, Tainui, a lot of the major iwi who have great capability in this space. Some of them even have access to land. So I’m hopeful, touch wood, that we can really get some of this stuff going and for us it has to be focused on that financial return,” said Orr.
Orr wouldn’t be drawn on whether any deal may be close to fruition on Auckland housing investment, but said the Super Fund is “permanently in the marketplace” and “permanently looking for opportunities.”
Europe, ‘where things feel uncomfortable’
Asked where in the world the Super Fund currently sees the better investment opportunities, Orr said generally where things feel most uncomfortable, which at the moment’s in Europe.
“Their equity markets have not recovered to any extent relative to the Asian markets, emerging markets, the US market and so we’re quite confident being a long-term investor in that area, and we see reasonable value there,” said Orr.
He also said he believes global interest rates are well below any sense of long-term fair value.
“So we’ve been positioned for a long while now, and it’s an expensive position to hold, anticipating a rise in global interest rates. And that (a rise) would be a good outcome. People tend to see it as a shock or a risk. But what that would be reflecting is real economic growth returning, average to low inflation returning, it’s a good outcome. If you believe 2.25% US 10-year bond yields at the moment, you are forecasting a very sad global economy and that’s just not the case.”
Milford on the slow road
A mandate held by Milford Asset Management to manage $281 million on behalf of the Super Fund was suspended in April due to an FMA investigation into Milford. The investigation’s now finished, with Milford fined $1.5 million, and civil court proceedings filed against Milford fund manager Mark Warminger, which he plans to fight, denying he manipulated the sharemarket. Milford’s mandate was suspended until the FMA probe was completed, with the funds now managed internally by the Super Fund.
Asked whether the Super Fund plans to reinstate Milford, Orr was cagey.
“(We) still have a mandate with them but there’s no cash in the mailbox. We just want to let some water go under the bridge with them. They have been busy investing significantly in their middle and back office, they’ve got a new portfolio manager running the part that was looking after our money. We want to see how that shop works together, and it’s not going to be soon. We’ll chat to them over the course of the next year or so and progress (from there),” said Orr.
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