Super Fund to kick off in September

The Guardians have confirmed the NZ Superannuation Fund will start investing in September. To find out what it may look like check out the 18-month old Irish Pension Fund. Philip Macalister reports on how the Irish fund has fared.

Wednesday, July 30th 2003, 10:08PM

The head of the multi-billion New Zealand Superannuation Fund, Paul Costello, has confirmed that the fund will announce its asset allocation on August 14 and begin investing in September.

With that it mind it’s worth looking at its closest cousin, the Irish Pensions Reserve Fund and how that has been invested.

The Irish and New Zealand funds are remarkably similar in how they are established and what they are tasked with achieving.

Both schemes are funded by their respective governments and are charged with partially pre-funding the future costs of the state pension. In Ireland’s case the contribution is 1% of GNP annually and New Zealand it is around 2% of GDP.

Accountability is similar in both funds with their boards being at arms length to Government although they report to Parliament. Likewise the funds are building up assets and will start to payout around 2025 when there demographic pressure on state pension costs will be high.

Perhaps one of the key factors with both funds is that their mandates are purely commercial and designed to secure optimal returns over the long term subject to prudent risk management.

Asset allocation

The Irish fund has an asset allocation which could be described as fairly aggressive. It has a strategic asset allocation of 80% equities and 20% cash.

Pensions Board chief executive Anne Maher says that the fund is yet to consider things like private equity, which are likely to play an important role in the NZS fund.

The other major differences between the Irish and New Zealand funds are that the Irish one isn’t allowed to invest in bonds issued by its government, nor does it have an ethical constraint.

Maher says the ban on government bonds was a major issue. She says it was made to ensure “that the fund many not be used at some future date to artificially support Government borrowing.”

She says the asset allocation was designed, with consultancy input, on the fact that fund draw-downs aren’t scheduled to begin until 2025 and they would take place over 30 years, the fund has strong cash flows. Also impacting on the decision was the “promise” with regards to the fund only partially pre-funding pensions, and the fact that the assumed average equity risk premium will be 3% over the life of the fund.

Currently the fund is in a mixture of funds ranging from passive through to active and enhanced share funds.

Averaging in for a not so ordinary fund
The Irish fund has taken an averaging in strategy. It held its assets in cash from April 2001 to December that year while managers were selected. Once it started investing in January 2002 it has taken an averaging in approach, and still is not fully invested, with 25% of its assets being in cash.

It has managed to outperform the average Irish pension fund since inception, however it has still made losses. It has generated 3.27% since inception compared to the average Irish manager which has lost –0.6% over the same period.

The following table illustrates what has happened.

While the fund, at €7.4 billion Euros is already big, it has a long way to go. It has an annual €1 billion cash flow and it has still to receive 90% of its cash flow.

One of the big areas of difference between the two funds is that the New Zealand one has a high profile (even though it doesn’t exist yet) while the Irish one is below the public radar.

“There would not seem to be a wide awareness of the existence of the fund,” Maher says. "Where people know about it they do not appear to understand the importance and relevance of it on a personal and national basis." With the market downturn and losses some opposition politicians have used it as a campaigning tool and argued that the money diverted to the fund would be better off being put into something else, like health.

"The debate has not been a good one and to some extent it may have resulted in the spreading of misinformation," she says.

While some parties campaigned, during Ireland’s 2002 election, on platforms such as suspending payments to the fund, the party which was returned to power was the one which established it and they have continued “their clear commitment to it," Maher says.

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