Sir Robert Muldoon will be turning in his grave after this week's announcement that the New Zealand Superannuation Fund will acquire 41.1 per cent of Fidelity Life.

This has reignited the debate about the role of government sponsored superannuation, particularly whether it should invest mainly in New Zealand or offshore.

The issue first arose 43 years ago when the NZ Superannuation Scheme was established by the Third Labour Government under the Superannuation Act 1974. The scheme had these characteristics:

• It was compulsory for all employees between 17 and retirement age
• Money could only be taken out early when a contributor permanently left the country
• Each contributor had their own individual account and these accounts were portable
• After a short phase-in period, contributions were 8 per cent of gross income - 4 per cent by employees and 4 per cent by employers

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The scheme started taking contributions on April 1, 1975 following the formation of the Superannuation Corporation, which was established to manage contributors' funds.
The National Party, under Muldoon's leadership, claimed that this was a socialist scheme.

Muldoon argued that the state, through the Superannuation Corporation, would eventually control most of the country's major assets, even though contributors had their own individual accounts.

There was little or no recognition of the fact that a large percentage of the scheme could be invested offshore.

National fought the 1975 general election on just two major issues: the replacement of Labour's compulsory scheme with National Superannuation; and "restoring New Zealand's shattered economy".

The election campaign was characterised by the famous National Party "dancing Cossacks" TV ads, aimed at giving the impression that the scheme would turn New Zealand into a Soviet-style communist state.

The Cossacks ads proved to be extremely effective, with National winning 55 seats and Labour only 32, compared with Labour's 55 seats and National's 32 before the election.

Just 16 days after the November 29, 1975 election, the newly appointed Prime Minister Muldoon terminated the Superannuation Scheme and replaced it with the current taxation-funded National Superannuation.

The latter cost taxpayers $13 billion in the June 2017 year, far more than any other Crown benefit.

Ironically, our current National Superannuation is more socialist than Labour's NZ Superannuation Scheme, the demise of which showed how easily voters can be influenced by clever advertising and slogans.

The abolition of the compulsory contribution scheme was a disaster for the country, as Labour's scheme would now be worth more than $500b and we would probably be the Switzerland of the Southern Hemisphere.

We would have a buoyant sharemarket, we would still own ASB Bank, Bank of New Zealand and other major companies acquired by overseas interests. Our entrepreneurs would have a plentiful supply of risk capital and New Zealanders would probably own several large Australian companies.

Most New Zealanders would face a comfortable retirement and be the envy of their Australian peers. The NZ Government would have a substantial Budget surplus, minimal borrowings and we would have one of the world's best public healthcare systems.

The defunct Superannuation Corporation could have partially funded the country's infrastructure, including a far better highway system than we now have.

Instead, we have a costly taxpayer-funded National Superannuation scheme that represents a massive contingent liability for future generations.

The superannuation ping-pong game between Labour and National has continued in recent years.

The NZ Superannuation Fund was established by Labour Finance Minister Michael Cullen in 2001 to partly finance the Crown's massive commitment to National Superannuation.

The Labour Government contributed $2b per annum to the fund but these payments were suspended by the National Government after its 2008 election success.

Nevertheless, the Fund has been a huge success, with Crown contributions of approximately $14b now worth more than $36b. The Fund has had an annual return of 10.35 per cent since inception in September 2003 and 9 per cent per annum over the past 10 years.

If the original 1970s Superannuation Corporation had achieved these returns, then the aborted Labour Government compulsory scheme would be worth substantially more than $500b after 42 years of existence.

In 2007 Finance Minister Cullen introduced KiwiSaver, with a $1000 kick-start payment and an annual member tax credit of up to $1040. Not surprisingly, National's Finance Minister Bill English abolished the $1000 kick-start payment and reduced the annual tax credit from a maximum of $1040 to $521.

This was a continuation of the superannuation to and fro, whereby a Labour Government introduces a scheme and the following National Government either abolishes it, reduces the Crown's contribution or removes incentives.

Nevertheless, KiwiSaver has also been a huge success, with 2,790,000 members and total funds under management of $43b. While this is impressive, the combined KiwiSaver and NZ Super total funds of $79b fall well short of the estimated $500b to $600b that would be in the compulsory scheme initiated in the mid-1970s, if it had survived Muldoon's pernicious axe.

The dancing Cossacks ads made three major claims:

• The Superannuation Corporation would have the money to own every share in every NZ public company within seven years
• Soon it could own all the farms
• The government could end up owning everything

The accompanying table, which contains the asset allocation of the country's three largest investment funds, clearly shows that these claims were ridiculous. A prudent manager would never buy all the shares in all the listed companies, all the farms and all the assets of a country.

Rumours were rampant during the 1975 election campaign that the Superannuation Corporation had already bought most of the country's major buildings, but its first and only annual report revealed that the corporation owned just 13 properties at a total cost of $5.1m.

At present, ACC has only 8 per cent invested in NZ equities, while a combined 86 per cent has been allocated to bonds and global equities. The state insurance organisation has invested in the Wellington Transmission Gully and Puhoi to Warkworth public-private partnership highway projects, indicating how these large funds can help finance the country's infrastructure.

The NZ Super Fund has only 15 per cent of its total funds allocated to NZ, with its largest domestic investments in this order: timber, NZX-listed companies (excluding Z Energy and Metlifecare), fixed interest securities, Kiwibank, farmland, Datacom, Metlifecare, private equity funds, infrastructure and Z Energy.

KiwiSaver has 44 per cent of its funds invested in New Zealand according to Morningstar, with three-quarters of these allocated to bonds and cash. KiwiSaver funds have an offshore investment bias and will never end up "owning everything" in New Zealand.

NZ Super's $100m investment in Fidelity Life, a specialist life insurer, represents only 0.3 per cent of its total funds and would rank between private equity funds and infrastructure in the NZ asset allocation list above.

The only possible concern is that the life insurance sector is light on capital and NZ Super's deep pockets could give Fidelity Life a clear advantage over its competitors.

Nevertheless, one of the most interesting developments in the months ahead will be the next steps in the long-standing to and fro between Labour and National over superannuation. At this stage, the new Government has promised to keep the National Superannuation entitlement at 65 years of age and resume the Crown's contribution to the NZ Superannuation Fund.

Considering Labour's progressive approach towards superannuation, and the youthfulness of new Prime Minister Jacinda Ardern, is the scene set for a new innovative serve in the superannuation ping-pong game?

- Brian Gaynor is an executive director of Milford Asset Management.