The Kirk government’s 1974 superannuation scheme required compulsory contributions to individualized and portable accounts drawn on at retirement age, supplementing a base pension. A Superannuation Corporation invested in shares and bonds to grow retirement savings, while at the same time investing in New Zealand’s economic development. However, in 1975 the Muldoon government repealed the 1974 scheme and replaced it with a “pay as you go” system with no compulsory savings element.
Australia took until 1992 to introduce its own equivalent of New Zealand’s 1974 scheme, however it has stuck with it, and as at June 2020 its superannuation assets totaled around A$2.9 trillion. As a result, Australia is a more capital-intensive and productive economy than New Zealand, it has higher per capita income, and its retirees are far better off financially. Australia owns dominant stakes in its major industries and corporates, and it has a much stronger offshore investment position.
Since Muldoon’s disastrous decision, successive governments have struggled with the NZS’s affordability. With Michael Cullen’s visionary leadership, the Clark administration established the NZ Superannuation Fund (NZSF) in 2001, to accumulate savings to part-fund future NZS outgoings. The NZSF has also contributed significantly to capital market development. In 2019 the NZSF was worth around $44B, with over $6B invested in New Zealand, including in knowledge-intensive businesses such as Datacom and financial services businesses such as Kiwibank.
KiwiSaver was launched in 2007, and as at October 2019 it manages around $62B. It is deepening and diversifying our capital markets. For example, KiwiSaver managers such as Booster, Milford, Kiwibank and Simplicity are investing in venture capital and in private equity. KiwiSaver funds could also be encouraged to invest in domestic as well as overseas infrastructure.
Long-term productivity determines per capita income and therefore wider wellbeing. However, New Zealand’s economy is capital-shallow, and this means a low capital to labour ratio and therefore low labour productivity. Furthermore, capital investment flows are distorted towards property and the non-tradeable sector rather than export businesses and supporting infrastructure. From Glaxo over a century ago to recent digital, biotechnology, electronics and electrical engineering examples, thin and impatient capital markets have long stunted growth or forced our most knowledge-intensive businesses to move offshore.
To lift productivity and grow international competitiveness we need to lift domestic savings and steer its investment into wealth-creating tradeable sector businesses.
Within the NZSF, the Elevate NZ Venture Fund was established in 2019 to support early stage growth companies and the venture capital ecosystem as a whole. While there is plenty of seed and start-up venture capital available, Elevate NZ may fill a gap for growth capital investments of around $20M. However, it is difficult for our growth businesses to raise locally $50M to $150M in equity investment to achieve international scale and competitiveness, while anchoring core benefit streams in New Zealand. This lack of $100M or so “growth and anchoring” equity investment is a big gap that should be filled.
Covid-19, recession and international instability have shaken New Zealanders. A Labour government with a strong electoral mandate opens an “Overton window” Overton window within which it can progress fundamental change. Michael Cullen’s work on the NZSF and KiwiSaver, David Parker’s on Elevate NZ, and business voices such as Brian Gaynor and Sam Stubbs have laid a platform to build from.
Sovereign wealth funds invest internationally, however they tend to have a strong domestic focus. Keynes himself argued that while ideas must be international, capital investment should be local What we might learn from Keynes about investment being local
Substantial ongoing contributions must be made to the NZSF to support its NZS pre-funding role. However, a larger share should be invested in knowledge and technology-based businesses, focusing on their internationalization whilst retaining core competencies in New Zealand. As well as Elevate NZ, the NZSF should invest in around the $100m business equity range. KiwiSaver should be made compulsory, to deepen capital markets and support economic growth as well as lift retirement savings. With these changes, the NZSF and KiwiSaver together would replicate the economic impacts sought from the 1974 Superannuation Act, and would create a productivity-enhancing growth path for our sustainable economic development.
The question now is who in our polity or business community can understand how disruption in our times creates opportunities for future times, perhaps saying to herself, whilst thinking of those who come after:
The time is out of joint, O cursed spite,
that ever I was born to set it right…