• Adrian Orr is chief executive of the NZ Superannuation Fund. He is also Chair of the International Forum of Sovereign Wealth Funds, and Chair of the Pacific Pension and Investment Institute.

Recent public comments illustrate that many people don't understand what the New Zealand Super Fund is and what it does, and the role of The Treasury.

In short, it is Treasury's role to manage all of the legislated processes of assessing the size of capital contributions to be invested, and when withdrawals are to be made, to meet some of the future rising costs of superannuation. It is the NZ Superannuation Fund's role to invest this capital - as an operationally independent, for profit, organisation. The Guardians of New Zealand Superannuation ensures these investments are being made consistent with the relevant law.

All relevant information on our purposes, funding, performance, responsible investing and future effectiveness is available from Treasury's and the NZ Super Fund's websites.


Despite this transparency, recently the media has reported a number of points regarding the Fund which suggest some key aspects of the Fund are not well understood. These have included:

• the fund is soon to be "sold down" and would not be effective at smoothing future tax payments;

• capital contributions were intended to only come from Government operating surpluses, with their size and frequency variable and discretionary;

• NZ would be better off paying down Government debt;

• NZ would be better off managing the NZ Super Fund as a passive fund; and

• the fund has missed the investment good times (post-GFC), future returns won't be as good and hence the fund's chance of success is compromised.

First, the Super Fund is not about to be sold down. On Treasury estimates, the Fund will continue to grow for decades to come (peaking as a share of GDP in the 2070s), even though it will start making payments to the Government from 2035/36.

Second, with regard to meeting the fund's purpose, Treasury's funding model highlights that, at the fund's peak, its capital withdrawals and tax payments combined contribute over 20 per cent of the total net cost of pensions (or over 40 per cent of the incremental cost increase due to the rising proportion of retirees). A person born today will be 53 years of age in 2070. The funding formula is clear to cap the contributions to the level necessary to meet the Fund's purpose - in so doing sensibly recognising wider Government debt/spending issues.

Third, the funding formula contained in the NZ Superannuation Act does not contemplate that the capital contributions are to be made only out of operating surpluses - there is no such reference. Rather, they are an annual savings commitment based on a pre-set forward-looking pension-affordability formula. The calculation is undertaken and disclosed by Treasury.

The fund has not missed the good times. As a long-term investor, we are not trying to time the market. Rather, we are deliberately taking on compensated investment risks.


There is one provision that highlights the actions a Government must take if it intends to pay less into the fund in any financial year than the required annual contribution. This comes with conditions: disclosing the amount required under the legislated formula; the amount actually being paid; a statement for the reasons there is a difference; a statement on the Government's intentions on future contributions; and a statement of the approach the Government intends to take to ensure that the fund will be sufficient to meet payments of NZ superannuation entitlements expected to be made over the next 40 years.

Again, Treasury manages this process on behalf of the Government, as legislated. This section of the law was exercised when capital contributions to the Fund were stopped in mid-2009. The gap between the formula and actual contributions made, as calculated by Treasury, is currently $13 billion.

Fourth, the Government's wealth would not be improved if we had either paid down Government debt and/or managed the fund passively. To date, the Super Fund has generated investment returns at more than twice the cost of government debt servicing (returns of 10.04 per cent p.a. (after costs, before NZ tax), compared to the interest on Treasury Bills of 4.29 per cent p.a.).

This amounts to $17.3b made in excess of Government debt. That $17.3b includes $5b the fund has already paid to the Government by way of tax. The fund has paid tax of $3.8b since contributions were suspended, which constitute a net outflow from the fund.

The fund has also significantly outperformed a simple passive fund-equivalent (our reference portfolio) by $5.5b, and did so by getting more return per unit of risk than the passive alternative. The data on returns, benchmarks, and investment risk appetite is on the fund's website.

Fifth, the fund has not missed the good times. As a long-term investor, we are not trying to time the market. Rather, we are deliberately taking on compensated investment risks. This process enables the fund to benefit from compounding returns, and the additional risk premiums in excess of the cost of Government debt. As demonstrated in Treasury's modelling, we estimate the fund will return 7 per cent to 8 per cent p.a. over the long term - a return in excess of the cost of Government debt.

The Super Fund is an independent, non-political, for-profit entity with a specific purpose: to partially pre-fund the cost of retirement benefits for future generations of Kiwis. The fund has won global recognition for investment performance, transparency and responsible investing.

If you want to understand more, readers can go to our website www.nzsuperfund.co.nz where all the relevant benchmarks and comparisons are available.