Let's Privatise Superannuation.....

A few years ago while serving on the ISI (now FSC) Board, an Australian colleague recently arrived on our shores and appointed to the board, shared a view with me that on his arrival in the NZ market, he got the distinct impression that something was missing. Now, coming from the booming Metropolis of Sydney, he could have been excused that there may have been quite a few things missing relative to his experience in the bigger, faster, and harder Australian market.

To be specific, he was able to identify the missing aspect as a superannuation industry.

Put simply, Australia has one – NZ does not.

In a recent trip to the U.K. and Australia, I was struck by the financial media’s close attention and in-depth reporting of all matters relevant to superannuation, ranging from investment vehicles, administration platforms, taxation, legislation, product providers, and distribution. In fact, all the input factors which comprise a vibrant, dynamic, and vital industry, and which makes an important contribution to industry, commerce, and consumers, in a progressive community.

Returning to NZ to learn that the Retirement Commissioner recommending lifting the age of retirement by 2 years is merely “trying to have people pay more and get less” was a shock.

After all, what has the Commissioner to gain by making such an outrageous suggestion? Forget that some pretty well-qualified authorities have made similar suggestions, and ignore similar moves overseas to seek sustainability of retirement income for aging populations in the OECD territories.

After all, what do these people know when compared with the view expressed by someone in NZ, who is so vastly experienced and familiar with all aspects of a well-structured superannuation model?

Australia has somehow managed to accrue A$1,562,320,000,000 in super funds as at June 2013, and millions of Australian citizens have accrued substantial sums in their personal super accounts (any clues here about the wealth gap between Oz and NZ??), and can look forward to significantly comfortable retirement lifestyles.

Of course, the Australians – and others – long ago realised that government has little or no business in the provision of retirement income. Establishing private superannuation funds was, and still is, intended to shift the burden for the provision of retirement income away from the state and into the hands of private enterprise. Successive U.K. governments tried various models, shapes, and combinations, but no British government has proved to be a successful, sustainable, and viable provider of long-term retirement income.

Now poking a stick at the PM for accusing the Retirement Commissioner of conspiracy to deprive consumers is bound to attract howls of derision from right-wing supporters and some academic theorists.

And I admit to not being a dedicated fan of Friedman’s Chicago School of Economics or of unfettered free market capitalism – the U.S. government expropriating my AIG shares without compensation cured me of that view once and for all, thanks a bunch.

But levelling such accusations at the Retirement Commissioner truly beggars belief.

Apart from the complete lack of personal motive for making such a recommendation, the Retirement Commissioner’s position is entirely supportable and arguable, and to dismiss it without more appropriate and considered examination is entirely imprudent.

Even more of a shock, was the distinctly flaky suggestion that we should 'nationalise' Kiwisaver. Sorry, this is just nuts. Keeping a tax cash flow starved government away from the citizens retirement benefits fund has to be a top priority. Winston's suggestion gives a government carte blanche to pillage the funds at the first hint of a pre-election economic crisis. Not a good idea.

There are a number of countries coming to terms with the shifting demographics of their populations and making provision to extend the normal retirement age of their state-funded schemes. This is entirely logical as the current accepted age of 65 was set when average mortality – and therefore the length of time an individual would expect to call on the fund – was much less than it is now.

Of course, this only remains relevant if the retirement fund is preserved exclusively for the purpose of its establishment, i.e. providing retirement income. If, as NZ has embarked on, it is regarded as a home purchase vehicle or an emergency reserve fund in time of economic hardship, then the concept is forfeit.

There may be provision made in the event of a terminal illness, or for occupations which, by their nature, do not have a long-term earning prospect – saturation divers, for example, but apart from these circumstances, retirement accrual funds should not be access by beneficiaries until retirement age is reached.

More howls from the theorists about New Zealanders not liking their funds being “locked-in” – well, I don’t recall anyone asking about the introduction of GST specifically, so why should the terms and conditions of a private retirement benefit scheme be any different from the introduction and application of GST?

The further anomaly in NZ is the provision of retirement benefits to the richest and poorest members of the community, irrespective of their financial circumstances.

Also, operating a “Taxed-Taxed-Exempt” regime only ensures a growing proportion of the community will not be contributing to the tax take, placing a heavier burden on the remaining taxpayers. With a declining birth rate, and no certainty surrounding future immigration patterns, it seems to me that this government is deferring an issue for their successors to face up to at some undefined point in the future.

This state of affairs does, however, confirm a view developed over the years from experience in the U.K., Australia, and NZ – that government has no business in superannuation.

If we are witnessing the state moving away from running all the industries which have been privatised or partially privatised in the last 25 years, then superannuation should be included in the list.

The British and Australian governments have for many years had a handy source of capital available to them in the shape of their respective pension fund industries. Offering the investment managers 10 or 20 years government stock or gilts in the U.K. has long been an accepted source of funding various government infrastructure projects, and is infinitely more attractive than borrowing from overseas markets and suffering exposure to currency risks and interest rate fluctuations.

The theme of stimulating and developing efficient capital markets has run through a number of recent pieces of NZ financial services legislation.

A government of substance, and possibly not one that casts random flaky conspiracy theory accusations, needs to take the bull by the proverbial horns and start developing measures to shift the responsibility for the provision of retirement incomes away from the state and over to the private sector.

The sooner the better.

Slainthe

The Laird