It is now two years since the Government announced it would not be making further contributions to the NZ Superannuation scheme after the $250 million that was paid in 2009.
The reason was that with a current account deficit, it would have been contributing with borrowed funds. The Government did not say it would make no contributions in the next 10 years but rather that contributions would only be possible if there is a surplus.
The NZ Superannuation scheme was set up in September 2003. To dismantle it in 2009 after just six years would have been a disaster. The fund was not designed to replace the retirement pension of NZ Superannuation but assist from 2020 with about 14% of the pension cost.
The fund was set up after superannuation reviews as early as 1992 by the Todd Task Force, so named after the chairman of the group Jeff Todd. The original 1992 report was revisited in 1997, when Winston Peters pushed for a referendum on superannuation. Mr Todd's conclusion in 1997 was, "If it's not broken, don't fix it."
The 1997 review identified that from year 2015, the ability to fund the pension would be critical as it was exactly 70 years after World War 2 and the baby boomers would all be receiving superannuation.
The report recommended increasing the entitlement age for the pension gradually to 67 from 2015. It also recommended some form of means test be introduced from then as well. (The Superannuation Surtax was abolished on April 1, 1998.)
The New Zealand Superannuation website comments that persons now aged 44 will be the first to receive a benefit from the fund. It also suggests that its peak funding will not be until 2056, which is going to be most beneficial for those now aged 19.
In 2003, when the NZ Super fund started, the cost of servicing the NZ Superannuation pension was 3.6% of our Gross Domestic Product (GPD). By 2050, it is expected to be 10% of GDP. The New Zealand Superannuation Act 2001 prevents withdrawals before 2020. The fund started with $2.4 billion in cash and predictions at the time expected the fund to be at about $38 billion in 2013 (10 years), assuming continual contributions as well as accumulation.
Current value as at May 31, 2011 is $19.2 billion. It has grown by $6.1 billion since 2009 without additional contributions but it does not look like it can add as much as another $19 billion in two years without further contributions.
According to the fund's website, the return for 2008-2009 was -22.14% and +15.45% for 2009-2010. Year-on-year to date, at May 31, 2011, is a whopping 26.34% and it has averaged 8.06% per annum since 2003. (Return percentages are after fees but before tax.)
There was some concern when the original asset allocation of the fund was announced, as the aim was to have 78% of the assets outside New Zealand. With such a large fund and the smallness of the NZ market, the fund would dominate the sharemarket with as little as 7% of the fund invested in NZ shares.
At present, $4.1 billion of the $19.2 billion is invested in New Zealand. A most recent investment was a joint venture with Infratil to buy the assets of Shell in New Zealand. The joint venture has now been rebranded as Z Energy.
As commented in these columns before, the NZ Superannuation pension, at 66% of the average wage, is not sufficient to live. If you have not joined KiwiSaver by now you are missing out on many benefits, not the least of which will be assistance of your pension in retirement.
The NZ Superannuation fund will assist the pension from 2020 onwards, but its existence is not an excuse for not making personal savings in schemes such as KiwiSaver.
• Peter Smith is an authorised and certified financial planner and is the principal of Kepler Group Otago Limited. Email: pete@keplergroup.co.nz A disclosure statement is available on request and free of charge.
