NZ Super Fund returns

James Weir at Stuff reports:

The New Zealand Superannuation Fund has beaten the cost of debt by $346 million over nine years, according to a new analysis.

That “modest achievement” was not enough to justify the risks run by the Government’s Super Fund, according to an analysis by the Retirement Policy and Research Centre co-director Michael Littlewood.

The research centre is based at Auckland University.

The reality is that the impact of the NZ Super Fund on future affordability of superannuation was always going to be fairly modest, and that was even with optimistic levels of returns. When the level of returns is barely more than the cost of debt, it does raise issues over its importance.

The only proper way to measure that was by comparing the fund’s return with the cost of long-term government debt.

“That’s because the Government, if it wished, [could] sell the NZSF investments and repay that debt,” Littlewood said.

The Government had the choice with each contribution to either cut debt or ask the fund’s guardians to invest the money.

Like a household, it was not sensible to raise a mortgage on the family home and invest the proceeds in shares and other investments, unless the before-tax returns were better than the cost of debt.

Against that measure the Super Fund’s returns were “less than comforting”, Littlewood said.

In the year to June 2012, the Super Fund lost $645m based on what it could have saved by paying off debt instead.

That loss was based on the 5.04 per cent yield on 10-year government stock, against the fund’s guardians’ published return for the year of 1.1 per cent, giving a loss of $645m.

My concern is that we still have a high risk of significant failures in the US economy and the EU – and that would drive down returns again from the Super Fund.