A Trojan Horse For Pension Privatisation In New Zealand?
- Umesh Perinpanayagam
Bill English said Labour had to clarify whether its scheme was a move away from universal New Zealand Superannuation. "They're saying they're copying the Australian scheme, well the Australian scheme has a very tightly means-tested National Super". Mr Cunliffe said the comments were "a desperate attempt to discredit a terrific policy". His scheme was "absolutely" not a Trojan horse for changes to NZ Super. "Our aim is to maintain a strong sustainable universal superannuation system" – Election 2014
When considered in the global context it is difficult not to see the introduction of KiwiSaver with the concurrent calls for the reduction of New Zealand Superannuation benefits as part of the move internationally to privatise social security. From 1981 to 2004, there was a paradigm shift in pension systems around the world. More than 30 countries, in whole or in part, replaced their Government-run, pay-as-you-go pension systems with ones based on mandatory, individual, privately managed savings accounts - a process often described as “pension privatisation”. While beginning in Pinochet’s Chile in 1981 and then the UK under Thatcher in 1986, most of these changes occurred in 1990s and 2000s primarily in Latin American and Central and Eastern European countries.
A key milestone was the publication of the World Bank report, “Averting The Old Age Crisis: Policies To Protect The Old And Promote Growth”, in 1994. The report advocated for a shift to the “Three Tier Model” consisting of: one, mandatory individual privately managed accounts; two, voluntary savings; and thirdly a minimum Government guaranteed floor of retirement income.While many of the welfare states of Europe and North America were unable or unwilling to replace their previous pension systems, they nevertheless increased reliance on private pension savings. For example, Germany’s public pension system was cut back in the 2000s and it introduced voluntary, State-subsidised pension savings accounts. In Australia, which previously only had a means-tested pay-as-you-go funded superannuation scheme, the Age Pension, they introduced private mandatory savings in 1992.
In 2005 the shift stopped abruptly, and until 2011 no country adopted pension privatisation. Several Central and Eastern European countries backed away from their earlier adoption during this period and two countries reversed the changes all together. This pause has been attributed in part to weariness of expanding reliance on financial markets following the financial crisis which started in 2008 and also the large fiscal costs that shifting pension systems would mean for governments in weak financial position post-crisis. The second factor has been a change in the discourse amongst international actors such as the World Bank, which have moved their primary emphasis away from mandatory private savings.
New Zealand however led the way with a “nudge” approach. While implementation of mandatory savings stalled, strategies that rather encourage employees toward private savings have been implemented during the crisis. This has been the case particularly in the Anglophone countries. KiwiSaver is the world's first national auto-enrolment savings scheme. The United Kingdom is in the process of adapting the New Zealand model. Even with large budget cuts, which include increasing the official retirement age, David Cameron’s government has decided to proceed with the last Labour government’s plan to introduce a scheme called the National Employment Savings Trust, despite the fiscal costs. This system features auto-enrolment and mandatory employer and employee contributions, as well as significant tax breaks for savers.
New Zealand Heading Towards The “Three-Tier Model”
A key policy of the 2011 and 2014 elections for the Labour Party was reducing Superannuation benefits (by raising the eligibility age of NZ Superannuation to 67) and making KiwiSaver a compulsory scheme - something they had ruled out when they legislated for it in 2006. The then Minister of Revenue in the Labour-led government, United Future MP Peter Dunne, however was less constrained to speak his mind, when a few months after KiwiSaver’s implementation in 2007, he stated “the logical next move is to make KiwiSaver compulsory”.
Michael Cullen, Labour’s Minister of Finance who brought in KiwiSaver, has recently outlined various ways the New Zealand Superannuation burden can be reduced even further. While the current John Key-led National government has cut some of the initial subsidies to KiwiSaver, National doesn’t fundamentally oppose this general direction proposed by Labour. John Key hasn’t opposed compulsory savings in principle and regards raising the age of Superannuation entitlement only as politically unfeasible at the current time.
The Greens have offered limited critique of KiwiSaver, focusing on the lack of “ethical investment” options and a lack of a public option, resulting in high management fees. While being nominally opposed to raising the age of Super entitlement they have supported the Labour Party’s “leadership on the issue”. Winston Peters has been more resolute on not raising the age of Superannuation eligibility, but has been a constant supporter of a compulsory savings scheme. Financial industry lobby group the Financial Services Council, the Retirement Commission (with close links to the industry), a plethora of economic and social commentators, from former National and Act Leader, Don Brash, to Child Poverty Action Group, all believe that universal Superannuation provision should be cut back.
Investing In NZ?
The expansion of KiwiSaver has been touted as a way to increase New Zealand ownership and control, serving the dual purpose of increasing individuals’ savings while helping rebuild the New Zealand economy. "Universal KiwiSaver also reduces our reliance on foreign borrowing and builds up our own pool of savings to invest in Kiwi businesses and create jobs. We will be able to own our own future, and grow our economy - not someone else's" – Labour Leader Phil Goff in Election 2011
The reality is that most KiwiSaver funds are invested offshore. The Morningstar First Quarter 2014 survey shows 51% of KiwiSaver funds are invested in overseas assets. This is much like other portfolio investments such as the New Zealand Superannuation Fund. Its’ September 2014 report states 61% of the fund is invested in global equities. The Government Superannuation Fund and the Earthquake Commission’s Natural Disaster Fund also have majority overseas investment. They both were shifted from investing largely in New Zealand Government bonds to a portfolio investment approach around the same time as the Superannuation Fund’s establishment under the last Labour government.
Large overseas investments are predictable for the profit maximising strategy that these portfolio investment vehicles are designed to carry out. As the legislation for the NZ Superfund states: “The Guardians must invest the Fund on a prudent, commercial basis and, in doing so, must manage and administer the Fund in a manner consistent with (a) best-practice portfolio management: and (b) maximising return without undue risk to the Fund as a whole”.
The profit maximising strategy may seldom result in public interest investment or behaviour. For example, in 2013 in Parliament, the then Labour Leader David Cunliffe raised the issue that representatives of the ACC and NZ Superfund, which both own significant stakes of NZ Oil and Gas, voted against paying compensation to the Pike River mine victims. Cunliffe said their actions were "reprehensible" and that ministers should have stepped in, but as Finance Minister Bill English said, correctly, they are legally not allowed to do this.
It was on these points, that neither overseas investment nor the investment in corporate shares were for the public benefit of New Zealand citizens, that the Greens refused to commit to support the second part of the New Zealand Superannuation and Retirement Income Act 2001, which established the New Zealand Superannuation Fund: “The Green Party believes the $2b going into the Super Fund each year should be invested in infrastructure, not overseas shares. That would help boost growth and ‘future-proof’ New Zealand.
“The Green Party not only believes that the Cullen Fund is risky but it also represents an enormous opportunity cost. It stops us from properly tackling the many challenges facing us. As (former BNZ Chief Economist) Len Baylis says ‘the best future safeguard for NZ Super is that funds would be far better spent on education and training and “active aging policies”, which are vastly more important to sustain future NZ Super than pre-funding. We agree”. The Greens appear to have now dropped these objections, having stated in their 2011 proposal to create a “public” default KiwiSaver provider that funds deposited with the New Zealand Superannuation Fund can be: “managed in an arm’s length, commercial way, in the interests of the New Zealand economy”.
The only thing Kiwi about KiwiSaver is perhaps the name. While the Government helps administer KiwiSaver it is primarily Australian financial institutions that profit. Three Australian banks - ANZ, ASB and Westpac - control 60% of the $18.5 billion dollar KiwiSaver market and make tens of millions in fees each year. The fourth largest player is Australian-owned AMP. While previously superannuation was simply an income transfer through general taxation that required no financial intermediaries now over two million New Zealanders have portfolio investments - once the preserve of longer-serving, higher-income, male employees.
The “Three Tier Model” fits well with the interests of the finance industry, which would like to capture as much of this new market as possible – all those who could afford to save for retirement, while excluding those unable to. The “third pillar” of a Government safety net can provide for those people. Unsurprisingly then, the finance industry is opposed to any measures that may lead people to have confidence in the State provision of retirement income. As Vance Arkinstall, then Chief Executive Officer of the Investment Savings and Insurance Association, said in 2003: “We’ve been concerned for some time that all the publicity about the Cullen Fund has caused quite a large number of people to believe that they don’t have to worry about saving for themselves”.
Advertising campaigns such as BNZ’s “Choose KiwiSaver or Choose to work ‘til you die’” play upon an underlying message the universal New Zealand Superannuation will not exist in the future in its current form (“If you don’t have KiwiSaver, we hope you’ll be happy with your alternative”). A future source of profits for the finance industry will be fees from “annuity” products, which are yet to have widespread implementation in New Zealand. An annuity is an insurance product that you purchase with your savings, which guarantees you a fixed income for the rest of your life. This solves the problem of not knowing how long you will need to make your savings last for. This is an example of the elaborate financial edifice being created to solve problems that never existed under universal provision, as John Key described: “a very elegant system, it works well”.
A Return To Public Provision?
What are the prospects of returning to a public social security scheme like universal superannuation? As described earlier, two countries during the period following the financial crisis returned fully to public systems. These were Hungary and Argentina. The precursor to Argentina’s decision to end its private accounts (established in 1994) was the 2001 Argentinian economic crisis. At the time the Government used private accounts to help pay off Government debt obligations. This seizure of private account assets set the stage for reversing the system in 2008.
The Kirchner government elected in 2003 was strongly opposed to private pensions. In 2007, a law was passed allowing private account holders to switch back into the State-administered system; those with low balances were required to do so. This mostly voluntary shift was planned and legislated before the 2008 financial crisis. While only a minority of account holders switched before 2008, when the crisis hit the Government decided to close the private system down, transferring all the assets in private funds to the State social security agency.
In December 2010 Hungary was the second country in the world to dismantle its privatised pension system. The government of Victor Orbán imposed harsh penalties on those who chose to maintain private accounts, which included losing the right to a public pension. As a consequence millions transferred around $US14 billion in assets back to the Government’s pay-as-you-go system. Hungary, being one of the worst indebted countries in Europe at the time, used this money to reduce its high Government debt. As with Kirchner in Argentina, Prime Minister Orbán and his Fidesz Party had opposed pension privatisation from the start. The Fidesz Party did not vote for the individual account system in 1997 and, when elected in 1998, stopped the planned increases to individual account contribution rates.
One potential barrier to changing the direction of pension reform in New Zealand may be rights that could be established for the finance industry in treaties currently being negotiated by the New Zealand government: the Trans-Pacific Partnership Agreement (TPPA) and the Trade In Services Agreement (TISA). Investor-State dispute settlement (ISDS) provisions, which may likely be part of these treaties, have had a chilling effect on government reforms internationally across a range of policy areas.
With regards to the finance industry one example that has been identified was the provincial government of New Brunswick, Canada, which dropped plans to introduce a public car insurance programme due, in part, according to observers, to “aggressive threats of treaty litigation.” In response to public protest over steeply rising car insurance premiums, a cross-party committee recommended a public plan that would achieve an average 20% reduction in costs. The Insurance Bureau of Canada, representing Canada’s largest insurers, responded sharply that the proposal could trigger North America Free Trade Agreement (NAFTA) investor-State cases from foreign insurance providers as an “expropriation” of their market share.
In New Zealand, reaction to the Green Party’s announcement of a policy to create a public default option for KiwiSaver prior to the 2011 election may give us idea of how the finance industry may react to Government pension reforms if such ISDS provisions were in place. The Financial Services Council, representing 90% of KiwiSaver providers, including the two largest providers Westpac and ANZ, stated as follows: “The Green Party policy proposes that a seventh publicly-owned default provider be added to the existing private default providers, prior to the review of default arrangements in 2014, and subsequently having a sole public provider, the NZ Superannuation Fund, after that date.
“If there were to be a change in the default provider arrangements before 2014, it is likely some of the default providers may seek compensation for their investment in new systems that were predicated on there being six and not seven default providers. This is not consistent with the original agreements entered into with default providers and neither is it consistent with the desire to build a robust capital market that attracts participants to offer funds management and other related services to New Zealanders.”
I argue that KiwiSaver and superannuation reform should be seen as part of the global movement to privatise superannuation by moving toward the “Three Tier Model” as promoted by the World Bank. While having not introduced mandatory private savings, as has been the case in a few other Organisation for Economic Cooperation and Development (OECD) countries, New Zealand is a leader in pioneering the “nudge” approach to expanding private savings. KiwiSaver is the world's first national auto-enrolment savings scheme. A scheme potentially set to become compulsory in the near future.
This privatisation benefits primarily the big Australian banks and shifts more investment into the corporate enterprises, largely overseas. Returning to a publicly-controlled social security system has been achieved in two countries recently, Argentina and Hungary. A barrier to achieve such changes in New Zealand or creating new public investment mechanisms may be hindered by current treaties being negotiated by the New Zealand government - the TPPA and TISA.