The NZ Herald published a feature article on retirement income savings on February 28. The author was strongly critical of the New Zealand Superannuation Fund’s construct and recent performance. In response, Adrian Orr chief executive of the Guardians of New Zealand Superannuation had the following to say:
The fund is a simple concept. The government has legislated to invest money today to gain a return over the long-term. That return is to be used in the future to smooth the tax burden of the rising cost of superannuation income. One measure of financial success is whether the returns to the fund over decades are above the cost of government borrowing. This may or may not be the case over any randomly selected day, week, month, or year. In keeping with that we have deliberately and repeatedly highlighted the wide range of year-to-year outcomes we expect over the life-time of the fund, including negative ones. We have used our annual reports to illustrate this. A government is in a great position to benefit from investing over decades, more so than any individual. It can focus on the long-term and hence make investment decisions not available to many. It has the ability to ride out the tough patches and avoid ‘fire sales’. And, it can fund this activity at the cheapest rate and receive the tax on its local investment. The chance of investment success is as good as it can get. Right now, the earnings prospects for long-term investors have improved significantly. This is great for the Super Fund with the majority of contributions ahead. The global recession has seen asset prices fall and the rewards for accepting investment risk rise to historical levels. History also teaches us that the best time for investment returns is after significant downward corrections. However, we do not manage the portfolio around expectations of near-term events. Forecasting short-term is near impossible and leads to a lot of cost and lost opportunities. Exactly when a boom or bust will happen, what will trigger it, how it will unfold, and what the investment implications might be can not be forecast with useful precision – otherwise they would not happen. The forecasts the author of the feature article mentioned are long-term returns. Likewise, putting money only into cash or fixed interest dooms the fund to failure from the outset. The future retirement income liabilities, which follow nominal wages, will outpace the returns. Instead, the fund is invested for the long-term across a very wide range of assets that give us the best chance of buffering rising future retirement income payments. Diversification is the best means of managing investment risk. Imagine if we only had one asset and it happened to be the worst performing. A diversified portfolio removes that risk. And, we spend a lot of time on investment manager due diligence. Furthermore, whether a government’s operating accounts are in surplus or deficit makes no difference to the investment proposition of the fund. Neither do the returns to the Fund impact on the variability of the government’s debt program. The Guardians’ legislation was designed to provide clarity of purpose, operational independence, and transparency. It is recognised internationally for those features. When I took over two years ago following my role at the Reserve Bank, I inherited a set of investment assets selected to grow and to weather the long-term. These were chosen on a set of investment beliefs. Since then, we have been able to attract and retain world class people, and continue to implement a significant NZ and global investment strategy. We greatly increased our ability to manage and monitor our risk and liquidity, and invest in market-tracking indices, so that we are cost-effective and can avoid being forced to sell illiquid assets. We have raised the hurdle on our investment managers and let some go, and we have introduced tougher due diligence processes. And, we have deliberately reconsidered our global private equity and property strategies. Finally, we have benchmarked ourselves against the best in class long-term investing fraternity. They have all experienced the same challenges and remain committed to long-term investing. These are testing times which create the opportunities for long-term investors.