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DPF agrees, cancelling Cullen Fund rips off NZ

Written By: - Date published: 6:46 pm, June 2nd, 2009 - 39 comments
Categories: superannuation - Tags:

DPF writes on the cost of cancelling contributions to the Cullen Fund:

First of all, it is true that under the 11 year contributions holiday, the Super Fund in 2030 will be worth only $81 billion instead of $118 billion – a $37 billion difference….Over the 11 years 2009 to 2020, there would be $19.5 billion of borrowing. Then the interest on the borrowing (calculated at 6.73% – the average cost of Govt bonds according to the Super Fund) would be $7.7 billion. So by 2030, the Crown would have an extra $29 billion of borrowing.  The difference between the extra debt and the fund’s level is estimated to be $8 billion.

So there you have it. Plain as day. Cancelling the contributions costs $8 billion over and above the cost of borrowing that money.

Treasury says it. DPF says it. Common sense says it – over the long-run the return on managed funds exceeds the cost of risk-free debt. In fact, the loss from cancelling contributions is exponential and keeps growing long after contributions have resumed.

National is now falling back on some desperate lines.

Nobody buys the comparison between a household borrowing to save, not least of all because most households do borrow and save at the same time and, more importantly, because the government is not a household it can borrow very cheaply and invests over generational time-frames.

The new line is ‘the Cullen Fund has made a lower return than the cost of bonds since its inception’. That’s true but only because we have just had the worst financial crash in 80 years. Before that the return on the Cullen Fund was over 12% a year. Right now the Fund is making mammoth returns – 8% in in the last month. Unless the markets never recover (and I don’t think anyone in the capitalist rightwing believes that) the long-run return is going to exceed to cost of bonds, despite a bad year or two now and again.

The final, ridiculous, line is that the Cullen Fund barely has any effect on the cost of superannuation. It’s true that most of the cost of superannuation in the future will still come from taxation at the time but every dollar less in the Cullen Fund will need to be raised in extra tax later or cuts to superannuation entitlements. National dismisses the funding gap created by cancelling the Cullen fund contributions as ‘less than 1% of GDP’. Yeah, less than 1% of GDP, each and every year for decades. In just twenty years from 2030 to 2050, we will have to find an extra $40 billion to fund superannuation that would have come from the Cullen Fund. On top of that, in 2050 we’ll have $58 billion less in the Cullen Fund kitty to pay for superannuation if we stop these contributions for 10 years.

PS. Gareth Morgan has popped up saying ‘hey, let’s make Kiwisaver compulsory and divvy up the Cullen Fund among everyone’. Firstly, that idea ignores the economies of scale that large funds like the Cullen Fund reap (reduced fees etc) that smaller Kiwisaver funds would miss out on. Secondly, there are inter-generational issues in giving the money from a fund with a hundred year life-span to today’s taxpayers alone. Thirdly, Gareth Morgan owns a Kiwisaver fund, so I think he might have interests other than the public good here.
-Marty G

39 comments on “DPF agrees, cancelling Cullen Fund rips off NZ ”

  1. “Firstly, that idea ignores the economies of scale that large funds like the Cullen Fund reap (reduced fees etc)”

    I don’t mean to divert the thread, but you’re being a bit disingenuous. I think it is pretty widely accepted that monopolies charge higher fees than competitive markets, at least in the short run, regardless of who owns them.

    • Marty G 1.1

      Tom, you’re confused.

      You’re right that a large organisation (like a monopoly) can use market power to demand a better price but that doesn’t mean the Cullen Fund would charge fees (anyway, who is it charging these fees to?). A large fund like the Cullen Fund can get better deals from the dealers it buys shares and currency from. That saves the Cullen Fund money, giving it more to pay for superannuation.

      • Tom Mathews 1.1.1

        Well that’s fair enough, but I’m not sure why you would cite lower fees as an effect of an ‘economy of scale’ in that case. I was merely playing along with your game.

        As for ‘better deals’, I’m not sure I quite get what you are saying. People don’t just dole out more money in deals because the fund they are dealing with has more capital. If the fund was issuing bonds or something, perhaps it would do better, insofar as more capital is correlated with lower risk. But the super fund just buys stocks, shares, currency, etc. There is generally no risk to the people it buys from, so as long as it has the money, why should they care?

        Secondly, it also diversifies heavily, as you would expect. So it’s not like it picks up discount deals for buying up large, if such a thing even exists on the sharemarket.

        Finally, if bigger financial organisations always made more money, surely the American financial industry would be rolling in it right now.

      • Tom Mathews 1.1.2

        Reading through it again, it seems like you want to imply that the NZ super fund will benefit from paying reduced fees when it buys stuff, although in my defence, it was phrased fairly confusingly. Again, I’m not sure how that is supposed to work. Are fees inversely proportional to ability to pay in the financial world? It seems unlikely.

  2. OhPlease 2

    As the child of a baby-boomer whatever happens I will have to pay for the baby-boomers’ retirement.

    National want me to pay through increased future taxes when they retire.

    Labour wants me to pay by repaying the debt incurred from borrowing to top up the Cullen fund.

    Since the latter seems to have more upside risk – in that my future debt repayments might be less because the fund grows, wouldn’t I prefer to borrow to pay in to the Fund?

  3. tsmithfield 3

    Cherry picking from DPF’s article is hardly fair.

    He goes on to say:

    “An extra $29 billion of debt (costing $2 billion a year more in interest) makes future super almost as difficult to pay for, as having $37 billion less in the Super Fund.

    And if we get a credit downgrade, leading to higher interest rates, you could end up with debt rising by far more than the shortfall in the Super Fund. Likewise of the Super Fund does not meet targets, you can end up with less money.”

    So, DPF seems to disagree strongly with the concept that we should borrow to save. He also argues that when all relevant factors are considered, it may end up costing just as much or more to borrow for the Cullen fund, even allowing for a higher return over the cost of borrowing.

    Also, what do you make of Gareth Morgan on TV3 news tonight when he claimed that Labour’s call to borrow to save is “financial illiteracy of the worst kind”.?

    I think it is about time that everyone here started to pay attention to the opinions of a respected economist rather than uninformed journalists.

    • Marty G 3.1

      Why isn’t it fair? He makes a factual statement and I repeat it. So what that he argues against the logical conclusion arising from those facts? It’s not my problem.

      I would love for Gareth Morgan to explain why borrowing to earn a higher rate of return is financial illiteracy. I would also remember that he has a horse in the race. It’s in his financial interest to talk down the Cullen Fund, Hell he wants it wound up. Then he’ll get huge profits from Kiwisaver fees.

    • mike 3.2

      “Also, what do you make of Gareth Morgan on TV3 news tonight when he claimed that Labour’s call to borrow to save is “financial illiteracy of the worst kind’.?”

      Morgan is a leftie but never afraid to speak his mind – he must be discredited and smeared immediately

      • mike 3.2.1

        damn marty beat me by a few seconds – unreal…

      • Rick 3.2.2

        Gareth Morgan a leftie? Jebus Mike, talk about discrediting yourself. The man’s neoliberal to the core.

        • Pascal's bookie

          No Rick, anyone who has ever criticised the National Party, (or any of it’s policies), is an unreconstructed communist. That follows, as clear as day follows night, from the fact that the National Party was set up purely and simply, to oppose the Labour Party.

          If the Labour party says something, that thing is by definition leftie madness. Madness which the National party, being conservative and true to it’s roots, must oppose. So any opposition to the National Party (or any of it’s utterances) is ipso facto, objectively communist.

          Communist beliefs, so defined, are stain that lingers on a man’s soul. Ergo, whatever else he has said, done, or professes to believe, Gareth Morgan is a fucking communist.

          • Lookinthemirror

            Gareth Morgan has also criticised Labour therefore must be a capitalist/tory/neo liberal.

            If the National party says something, that thing is by definition right wing madness. Madness which the Labour party, being anti-conservative and true to its roots, must oppose. So any opposition to the Labour Party (or any of its utterances) is ipso facto, objectively capitalist/tory/neo liberal……yada yada yada.

            Then again perhaps he’s just a bloke with an opinion borne from experience of fucked up politicians from all sides of the politics.

          • Pascal's bookie


            What do you think I was saying?

  4. tsmithfield 4

    Marty G
    Why isn?t it fair? He makes a factual statement and I repeat it. So what that he argues against the logical conclusion arising from those facts? It?s not my problem.

    It isn’t fair because you have taken part of what he has said out of context and therefore given opposite meaning to what he actually was saying. When the context is added, as I have done, then it is clear he meant no such thing as you have tried to show him saying. What you have done is a cheap journalistic trick and you should know better.

    Marty G
    I would love for Gareth Morgan to explain why borrowing to earn a higher rate of return is financial illiteracy.

    I can’t read Gareths mind, but I dare say it is something to do with the only certainty in this type of arrangement being that the principle borrowed and accrued interest must be repaid. You should be able to work it out from there.

    • Marty G 4.1

      DPF says that the return on the Cullen Fund, on Treasury’s numbers, will exceed the cost of borrowing by $8 billion by 2023. That’s what I quoted and he’s right. His argument is just that $8 billion is less than $37 billion. Not impressive. He’s got the facts right and then tries to ignore them with a distraction over whether the Dom’s use of the $37 billion was misleading.

      “the only certainty in this type of arrangement being that the principle borrowed and accrued interest must be repaid. You should be able to work it out from there”

      That’s only a valid argument if you believe capitalism is dead. If capitalism isn’t dead then the return on a managed fund is going to exceed that on government bonds over the long-term. Even the neolibs in Treasury think that’s true.

      • tsmithfield 4.1.1

        Not surprised. Just think it should be stopped. I hope the moderators do something about it. Its OK to disagree with someone, but it is only respectful to accurately quote their views.

      • Phil (not Goff) 4.1.2

        … then the return on a managed fund is going to exceed that on government bonds over the long-term.

        If you could claim that with any certainty, then you wouldn’t be sitting behind a PC – you’d be on a yacht in the Monaco harbour getting an full body massage from Megan Fox.

        The major factor you are ignoring is that the Cullen Fund is invested in relatively risky assets. Those assets, like all good capitalist free market products, go up AND down in price.

        The recent volatility/correction/collapse in equity markets has taken away all of the certainty surrounding future gains. It’s not that there isn’t money to be made, it’s just that it’s getting harder and harder to pick the wheat from the charf. And, as Gareth Morgan pointed out, Mr Orr is no Mr Buffett.

    • indiana 4.2

      why are you so suprised by Marty’s antics?…we’ve seen this before here where a quote is used out of context to drill home a point.

  5. djp 5

    You guys are like the fella who borrows to make a bet on a “sure thing”

    Investors in stocks/fx/futures whatever… they always say the same thing to me: “Only invest what you can afford to lose”

    tsmithfield hits the nail on the head here:

    I can’t read Gareths mind, but I dare say it is something to do with the only certainty in this type of arrangement being that the principle borrowed and accrued interest must be repaid. You should be able to work it out from there.

    • Marty G 5.1

      This is not a bet on a horse These are Treasury’s numbers that show what anyone knows – managed funds beat bonds over the long-run. Hell, putting your money in the bank beats bonds in the long-run. This isn’t rocket science. Even my investments beat bonds and that’s mostly just term investments.

      If I could borrow as cheaply as the government and I employed a team of investors with such a good record as the Guardians of the Superannuation Fund (who have beaten the market in every year, including the last one) then I would borrow and invest the money on their advice.

      • Daveski 5.1.1

        My TAB account is doing better than the Cullen Fund:

        The Super Fund has received about $15.2b in contributions, but has been hammered by the global sharemarket collapse in the past year and is now worth about $12.5b.

        See Stuff

        But why let facts get in the way of ideology and bagging the Nats?

        • SPC

          Perhaps the Dominion Post is not counting apples as apples?

          $15.2B, quite a lot for how many years was it – 5 (I did not know we were puting as much as 3B pa in).

          Think people, if there has been a positive rate of return, 15.2 down to 12.5B is not what is being compared.

      • Lookinthemirror 5.1.2

        Aren’t treasury known for being somewhat out with their forecasts?

      • Tom Mathews 5.1.3

        They might have consistently beaten the market for a while, but despite appearances (or ideological preferences), the evidence suggests that people who do so are mostly just lucky.


        If you think that you could beat the market with a lot of money, convince people to lend it to you, and do so. But if you want to wager the money of everyone else without asking, I think you need a more convincing rationale than the very shaky one you’ve presented.

        • Pascal's bookie

          I don’t know why you think it is ‘without asking’. Smells like bs to me. Last I checked we have a democracy of sorts, with elections and such, and discussions in the mean time..

        • SPC

          Doh, there is a historic positive rate of return (over time) on investing savings in a diversified portfolio.

          Nothing lucky about it.

          Unbelievable, people are now questioning the ability of capitalism to gnerate profits and economic growth returns to investors as a way to defend National Party policy.

          This is starting to remind me of the 1981-1984 period when National was making a mess of economic management – when a National government lost trust in their own ideology and cronyism ran amok in its place (as it did again in the early 90’s but in accord with those looting the state assets for private profits).

  6. tsmithfield 6

    “These are Treasury’s numbers that show what anyone knows – managed funds beat bonds over the long-run.”

    This is Treasuriy’s projections. They are not realised gains. As I said, the ONLY, I repeat ONLY certainty in this sort of arrangement is that borrowed principle and accrued interest must be repaid.

    Keep meditating on this until you get it.

  7. RJ 7

    This debate in NZ is completely nuts. The NZ super fund underperformed all endowments at US universities last year – losing more than 50% in USD terms. The reality is that in an entirely predictable market downturn, the managers lost their (our) shirts. Sorry Marty, right now the NZ Super Fund has a very sorry record. Last year should have been about managing risk, not loading up on it as the current management elected to do.

    This is nothing to do with ideology. They grossly underperformed any relevant benchmark, and until they prove they can produce sustainable returns should get not extra capital. It is as simple as that. To borrow to invest in an underpeforming fund manager is asking for trouble.

    There are plenty of areas to attack the current government -RMA, Auckland . . . The Super Fund is not one of them.

    • SPC 7.1


      So a year ago this was the best of times and the Fund was a great idea and now in the worst of times, its not. How fickle, but for …

      So lets guess – given all Funds lost money recently, savings via fund management is something no one should do again and we should all pull money out? No one should buy stocks again and cash is king when deposits return 4.5% and tax on this return is 30%?

      Is that not your argument?

      As to your motive … (why this debate in “New Zealand” by the way – it was in UK, Europe and the USA where money was lost and companies went bankrupt)

  8. SPC 8

    In response to Farrar’s concerns

    The Fund can borrow to fund its own growth – it can cover the cost of this borrowing from its existing earnings off investments.

    The Fund could be required to borrow within a range of a proportion of its own value, to prevent risk.

    A business once established will grow via borrowed funds – often up to the value of the capital input. This is sound practice whenever the business sees an opportunity while it does not have the capital available (its sound position allows them to borrow at no risk to the viability of the business).

    Thus the Fund could conservastively borrow 6-7B now (1/3rd of assets with an existing $12.5B capital) while rates are cheap for those with good credit ratings – and invest while stocks are at low values.

    This would allow a Fund review in 3-5 years time. If the Fund had grown on a recovery in stocks, but the cost of borrowing was rising with economic growth and rising government debt, then the Fund could profit take and repay debt.

    This could occur as the government budget came back into balance and was in a position to put further funds in.

    (I agree with critics of the Fund, that they should have profit taken and gone into cash in 2007/8, but that is no reason not to learn from that error and take the profits available in a few years by investing now)

    In response to Gareth Morgan, the riposte to his suggestion from a nuetral position is obvious.

    The government cannot afford the tax incentives for Kiwi Saver (offered as a way of dispersiong the then budget surplus in a non inflationatry savings way), (while the budget is in deficit they should be abandoned) so this should end and the money saved invested into the Fund.

  9. sunny 9

    Fascinating listening to Radio NZ National’s news this a.m. After citing Labour’s fears that suspending Govt’s contributions would lead to cuts in Super in the future they implied that the former Todd Committee on Super disagreed with a highly selective quote.

    However, earlier in the bulletin the Todd Committee was quoted as saying Super would be ‘trimmed’ and the age of entitlement raised.

    Who’s writing this stuff for RNZ? Some Nat staffer? Or just Sean Plunkett?

    Oh, and personally, we looked at KiwiSaver, remembered Muldoon’s hatchet job on an earlier scheme, and gave it a swerve.

    The Australians have a super scheme because no Govt. of theirs would dare swindle them. We’re way too easy to bamboozle and intimidate…

    • gingercrush 9.1

      Are you thick? They raised the age to 67 in the future. You also accuse National Radio of bias because you didn’t agree with it? That is pathetic. The whole debate around superannuation is pathetic. The fact you have Draco T and Quoth who both claim capitalism is broken yet somehow supports the Cullen Fund speaks of how pathetic this issue has become. The way the left are acting you’d think the Cullen Fund is wholly funding Superannuation for the future.

  10. tsmithfield 10

    In response to Gareth Morgan, the riposte to his suggestion from a nuetral position is obvious.

    The government cannot afford the tax incentives for Kiwi Saver (offered as a way of dispersiong the then budget surplus in a non inflationatry savings way), (while the budget is in deficit they should be abandoned) so this should end and the money saved invested into the Fund.

    I think this is a better argument than borrowing for savings. However, it falls down in one important aspect.

    Phil Goff complained about the recent round of tax cuts from National on the grounds that they favoured the better off who tend to save tax cuts rather than spend them, thus, negating any stimulatory effect on the economy.

    If this is the case, then a good portion of the savings from tax cuts are probably going into retirement type funds, or paying off mortgages thus increasing equity for retirement.

    Those who choose to spend their tax cuts are helping stimulate the economy, even by Phil Goffs argument. On the other hand, many who choose to save will probably be taking care of their own retirement, potentially reducing the burden on the state. Thus, tax cuts could be seen to be positive for the economy in several ways.

    • Maynard J 10.1

      “On the other hand, many who choose to save will probably be taking care of their own retirement, potentially reducing the burden on the state. ”

      Means testing, anyone? Let us not give up on a decent super scheme at the first sign of trouble. What happened to ambitious for New Zealand? A series of deficits and suddenly everyone wants to raise the pension age, means test it or just slash funding and ‘hope for the best’. pathetic.

    • SPC 10.2

      I am unable to understand how National can run deficits (borrow money) while financing tax incentives for savings – while limiting growth in the Super Fund. All they are doing is setting future governments up to find tax paid Super at 65% of the average wage unaffordable.

      How can they borrow to finance private savings, but not for the surety of what they are committed to providing – 65% of the net average wage to those over 65?

      If it was a business – committed to guaranteeing a future annuity from contributions (taxes) but they were using the money for another purpose, one would call it fraud.

  11. Jasper 11

    Dominion Post isn’t comparing apples with apples at all.

    NZSF has received $12B in total contributions. At the highest point, it was worth $14.5 billion in August 08 having received a total of $10.5B in contributions.

    Right now it’s worth $12.5B having received a total of $11.5B in contributions. It’s made $1B on top of its investments.

    Dominion Post doesn’t do reporting. Just listens to the man on the street doncha know?


  12. Flaco 12

    Firstly, there is no such word as “firstly” in the context you have used.
    The correct usage is “first”. Sorry, but that usage drives me nuts, especially when from peolpe writing articles.
    Second, Re: Gareth Morgan etc “that idea ignores the economies of scale that large funds like the Cullen Fund reap (reduced fees etc) that smaller Kiwisaver funds would miss out on.”
    – Um have you actually compared the performance of the Cullen Fund against the market benchmark? eg MSCI tracker or that of other Kiwisaver Providers?
    No? I have – it’s terrible, even if economies of scale are on your side for cheaper transacting, its worthless if investment performance doesn’t even match the market, yet along (shock horror) beat it… then what value are they adding? They have lost a HEAP of money, much more than they should have. The management are all muppets, and investors returns are all eaten away through poor investment decisions and top heavy management and aministration. The private sector are much better managers of assets than the Government – time has shown this again and again.

    • merlin 12.1

      from the Wiktionary: http://en.wiktionary.org/wiki/firstly

      “Whether it is proper to use “firstly”, rather than “first”, has often been disputed.
      Beginning in the early 19th century with de Quincey, who erroneously believed that “firstly” was a neologism, some have argued against the use of “firstly”, advocating the sequence: “First”, “secondly”, “thirdly”, ….
      The usage of “firstly” is also deprecated by some modern style guides.[2] The Chicago Manual of Style further recommends that all such -ly forms be avoided, and that list items begin only with “first”, “second”, and so forth.[3]
      Other authorities disagree.
      The American Heritage Dictionary comments:
      It is well established that either first or firstly can be used to begin an enumeration: Our objectives are, first (or firstly), to recover from last year’s slump.[4]
      The Oxford English Dictionary notes the dispute but does not pass judgment: “many writers prefer first, even though closely followed by secondly, thirdly, etc.”[5]
      “Firstly” may appear more formal than “first” and is often recommended for the formal enumeration of arguments.”

      I don’t know about ‘firstly’ but there certainly is no such word as ‘peolpe’

  13. Flaco 13

    Thanks merlin for the correction, though I wouldn’t trust wiki as an info source ;).

    “Firstly and thirdly have been part of the English language since the early 16th century. Secondly is even older, having appeared (in the Middle English form “secundelich”) in Chaucer’s narrative poem Troilus and Criseyde in the 1370s. These terms, including lastly, are certainly not “nonwords.” Almost a half century ago, A Dictionary of Contemporary American Usage pointed out that “Many speakers begin with ‘first’ and then go on with ‘secondly, thirdly’ and so on. But ‘firstly’ is respectable English” (Evans and Evans, 1957)

    Though unfortunately I have to pull you up on poeple….

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