Returns on NZ Super fund cut

The projected returns on the New Zealand Superannuation (aka Big Cullen Fund) have been scaled back.

The December Economic and Fiscal Update (DEFU) released today by the Treasury shows that officials have reduced their assumptions about the likely returns the multi-billion dollar fund will make.

It is now expected to make an after tax return of 7%, rather than the 7.5% projected earlier in the year.

The downward shift is due to a change in the assumptions about the expected market equity risk premium, the DEFU says.

The changes are not enough – yet – to cause the government to revise its annual contribution to the fund. The documents show the set of assumptions that the Treasury is working on are still highly speculative.

The Treasury is not working out the likely return on the fund as such: that is a job for the Guardians, once they have finalised their strategy.

Rather, Treasury’s job is to work out how much money the taxpayer will have to divert into the fund each year, and Treasury officials have to make a set of fairly heroic assumptions based on other assumptions in order to come up with such a figure. Those assumptions start on a 70/30 equities/bonds, and then make various assumptions around the likely return on equities, bond rate, management fees and tax rates.

All of these have to be assumed until the Guardians come up with an investment strategy -and that is not expected until the second quarter of next year. That may not be in time for more detail to be revealed in Minister of Finance Michael Cullen’s fourth Budget, which will probably be released in May or June.

What does look set to be included in next year’s Budget is a clearer indication on where the government is heading with its tax treatment of superannuation.

The Budget Policy Statement, released with the DEFU, outlined priorities for the 2003 Budget, and amid the expected bromides about innovation, skills development, and investing in infrastructure, the tax treatment of private savings is given a far greater prominence than it has been in the past.

"We will make tax treatment of superannuation more equitable," the policy promises. "This will potentially remove an important disincentive to save for those on lower incomes."