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When it comes to the super fund a little borrowing can go a long way

New Zealand Superannuation Fund boss Adrian Orr has been fighting the good fight in the face of some very odd logic.

OPINION: Borrowing to invest in the world's sharemarkets just doesn't sound right.

To the average mortgaged homeowner, focused on reducing debt and avoiding undue risk, it seems instinctively wrong.

Yet counter to all those instincts, it is the right approach to the partial pre-funding of future pension costs through the Government Superannuation Fund.

But you wouldn't even dream it was an option if you listened to most politicians weighing in on the issue over the past few weeks, as funding the future cost of state pensions has come back into the spotlight.

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The well-paid head of the "Cullen" Fund, Adrian Orr, has fought a rearguard action defending the wisdom of paying into the so-called Cullen Fund, even in years when the government's Budget may be in the red.


He has tried to avoid the political fight – as well he might. Yet it must be doubly galling for him that it is often the very politicians and commentators who profess to be the most business-savvy and economically-literate who use the most threadbare and populist attacks on the idea.

At the heart of the myth is the belief that we should wait until the Government's accounts are in surplus before resuming contributions, halted since 2008, and that to do otherwise would be "borrowing" for the fund.

There are a couple of problems with that.

First, the operating balance is generic, not the result of any single decision. If investing into the fund is one of your policies, and the overall result of all the government's decisions is a deficit, then necessary borrowing is no more for the Cullen Fund than it is to pay police or provide loans to tertiary students. Capital contributions into the fund are not made after a surplus is achieved, they are struck before the surplus or deficit. 

Second, if investing in the Cullen Fund's "risky" portfolio is so much worse than having debt, then we would be better, surely, to use any surplus to repay existing debt rather than shovelling it into the fund. (In this at least ACT's policy – to not contribute anything to the super fund while the Crown has any debt – is a more principled stance.)

But let's set that aside and play the game under those rules, by pretending that all the other decisions made of the Government – to fund education, defence or whatever – bring the accounts to perfect balance. So that investing anything into the super fund would have to come exclusively from "borrowing".

Would that be so dreadful?

Defenders of the fund point to its excellent performance since September 2003; a 9.89 per cent annual return, compared to the NZ Treasury Bill return of 4.31 per cent a year. So even if we had borrowed to maintain contributions during deficit years we would have ended up, collectively, well ahead.

Critics rightly say that the undoubted past success by the fund – or by any fund – is no guarantee of its future performance (although it's an odd investor who would prefer to ignore it completely).

But it is not the past performance of the fund that is the best guide, but the lessons of investment history. Over the very long term a portfolio weighted towards higher-risk assets (what KiwiSaver providers like to call euphemistically "growth" portfolios) will outperform government bonds or cash in the bank. Not every year, not every decade necessarily, but over the very long run.

And there are few funds that are in for the longer haul than the Cullen one. 

At the end of January its make-up was the classic "high growth" model; global equities made up 66 per cent of its portfolio and fixed income just 11 per cent.

What Orr and others are advocating is that governments take advantage of those long-term lessons by continuing contributions to the fund throughout the economic cycle. In the lean years and the good. Through Budget surpluses and deficits.

Orr has come in for his share of flak – even being called "barking" during a bout of gonzo-commentary by Matthew Hooton on National Radio – but the Cullen Fund boss is no doubt right.

He has also rejected the populist line of attack – going back to our homeowner – that government Budgets are somehow like household finances. The argument goes that no one in their right mind would borrow to play the world sharemarkets while they still had a mortgage.

As a comparison it may be politically effective but it is about as useful as a chocolate teapot.

Show me the household that can tax, has a central bank to set interest rates and biff around the exchange rate paid at the corner dairy, can borrow more cheaply than any business at rates below any mortgage offered by banks – and can live on for decades past the final days of its family members – and I'll show you the household that has much to learn from a central government or vice versa.

But again, let's set all that aside and ask; would a family ever invest in its future income while it still had debt? For education? To scoop up fancy, subsidised, returns from KiwiSaver? 

If it is in the interests of your family then of course you can and should invest for the future, maybe even borrow more, rather than focus on minimising debt.

So should we, as a country, "save as you go" to smooth the funding of future superannuation costs over 40-plus years, rather than pick and choose the "good" years or "pay as you go" when the costs arrive?


Alongside a gradual increase in the retirement age it makes good sense.

So should future governments Invest in the Cullen Fund every year, even when the books are in forecast deficit?

You'd be barking not to.