Day: May 2, 2018

Perhaps the Reserve Bank (and the FMA) should heal themselves

Michael Reddell Adrian Orr, Reserve Bank, Superannuation

Suppose that the rules of a superannuation scheme explicitly required that any rules changes that could have an adverse effect on the interest of any member in that scheme could only be made with the unanimous consent of such members.

Suppose too that nonetheless the trustees of such a scheme went ahead and changed the rules of a defined benefit scheme in a way that allowed the employer to arbitrarily (ie no constraints at all) reduce the rate at which pension benefits were calculated (including in respect of periods of employment, and employee contributions, prior to the rule change).  No consent from potentially affected members was sought for this change.

Suppose that in making this change, they had the endorsement/consent of the board of directors of the employer, and of the chief executive of the organisation.

Suppose too that that new power was actually exercised by the employer, in a way which led to longstanding employees later retiring with pensions considerably lower than they would otherwise have been.  That represented a substantial wealth transfer (probably millions of dollars) to the employer.

And suppose that the Government Actuary had been required to give consent to such a rule change, and in fact did so.

That looks to me a lot like serious misconduct, quite possibly illegality.

And who are the players in this tawdry drama?

Well, there was the Government Actuary, a task now absorbed by the Financial Markets Authority.

And there was the Reserve Bank of New Zealand, its Governor (appointed by the then Minister of Finance), and its Board (all appointed by the then Minister of Finance).  Serving on both the board, and the trustees of this superannuation scheme, was the Governor, and someone who is now chair of the New Zealand arm of Transparency International, an NGO allegedly committed to good governance etc.

The initial misconduct happened quite long time ago.  In 1988 in fact.    But for years now some members have been trying to get redress, and even recognition of the problem.  It has been going for sufficiently long that when Adrian Orr was last at the Bank –  as Deputy Governor and Head of Financial Stability –  he was involved, fobbing off concerns raised by some of his own staff.

Four years ago, a particularly persistent member formally raised the issues (the one I’ve outlined here isn’t the only example, although is probably the most serious) with the trustees of the superannuation scheme.  The initial response of the Board-appointed chair (and current Deputy Governor and Head of Financial Stability) was to attempt to close the issues down immediately, without undertaking any investigation. I guess if you don’t turn over stones, there is no risk of finding awkward stuff under them.  Fortunately, other trustees stymied that bid.

After a couple of years’ delay, the trustees somewhat reluctantly came to the view that probably member consent should have sought, and that the decision not to have done so was not necessarily one they themselves would today have made.  But………they weren’t going to do anything at all about rectifying the situation, claiming (on grounds almost totally without foundation) that no one had actually been adversely affected.  These are trustees who, by common law and now by statute, are required to operate in the interests of the members of the scheme (beneficiaries of the trust).  But who could easily have been misinterpreted as operating in the interests of the Reserve Bank (a majority of trustees appointed by the Reserve Bank Board –  the entity that has spent the last few decades providing cover for Bank management).  Under the (relatively) new Financial Markets Conduct Act, superannuation schemes are now required to have an independent trustee –  the one on the Reserve Bank scheme (whatever his other useful contributions) declared early on that he had no desire to be caught in the middle trying to sort out such difficult issues, and (from my memory) has barely uttered a word in all the debates since about these issues.

And what of the FMA?  It is now must be almost a couple of years since the member elevated the issue to the FMA, lodging a formal complaint with them.    And since then the FMA appears to have done almost nothing (there was a meeting with the trustees well over a year ago, but it involved little more than description of the issue –  and at the time the FMA themselves didn’t even seem to have a good grasp on their own act).   Perhaps it is typical for the FMA?  I don’t have anything else to do with them, so have no basis for knowing.  Perhaps there are legal constraints (old legislation) on their ability to actually do anything formally.  But there has been no informal action, moral suasion, either.   Indeed, their inaction could be easily be misinterpreted as having something to do with the fact that the organisation itself (as the Government Actuary) had signed off on the, almost certainly unlawful, rule change.  And perhaps too from the sheer awkwardness of having to investigate serious concerns about an entity associated with their fellow regulator, the Reserve Bank, an entity then chaired by someone who is now Head of Financial Stability (Bascand is no longer the chair, but is still a trustee).  Or from signs that the independent trustee regime they administer seems to be adding only overhead.

I don’t want to bore readers with the details of this particular tawdry episode.

But when we have the new Governor  –  with legislative responsibility only for prudential issues –  lurching from two weeks ago suggesting there were no particular conduct issues in New Zealand, because we had a quite different culture, to last week suggesting that it really wasn’t his call (on an inquiry) but he was sure banks were examining themselves, to news this morning that he and the FMA head had summoned the heads of the big banks to a meeting, demanding they prove a negative (that there is no “misconduct” going on), and (in the FMA head’s case) apparently threatening legal action against those who don’t cooperate, I could only think

Physician heal thyself

or continuing the biblical theme

And why do you look at the speck in your brother’s eye, but do not consider the plank in your own eye? 4 Or how can you say to your brother, ‘Let me remove the speck from your eye’; and look, a plank is in your own eye? 5 Hypocrite! First remove the plank from your own eye, and then you will see clearly to remove the speck from your brother’s eye.

(As background, I am both a member and an elected trustee of this superannuation scheme. I have recorded in the minutes my dissent from the majority view of trustees, and have expressed my own concerns directly to the FMA.  As I joined the Bank, and the scheme, not long before this particular questionable rule change was made, it probably did not materially adversely affect me.)

New Zealanders leaving Auckland

Michael Reddell Auckland, Treasury

Last month The Treasury published some new research aimed at providing better information on the population changes in each territorial local authority (TLA) between censuses.   At present we only have a census every five years –  and in some quarters there seems to be a push to reduce that frequency – and subnational population estimates between censuses have often been pretty poor, only to be updated and revised when the next census results finally appear.  At present, the published subnational population numbers are anchored to the 2013 Census, adjusted for estimates of the overseas net migration flow and data on  births and deaths.  In New Zealand we don’t have to tell some specific government agency when we move house or city.

Except that, as The Treasury observes, in practice we often do end up telling some government agency (or government-funded agency) or other –  in fact, are coerced to do so –  and the government has collated all that data in a single (anonymised) database.   That opens up enormous possibilities to use that data to, for example, update subnational population estimates in a way likely to be more accurate (albeit not very timely).   You might worry, as I do, about governments getting their hands on all that data combined, by some mix of coercion and seduction (eg have the slightest accident and you get into the ACC system) and worry that it might be used for ill as much as for good.  But, like it or not, the data are there and The Treasury is using them.

This chart from their paper gives you the picture of the data they are using

tsy popn

But my interest is less in the details of how they calculate their estimates, as in some of the bottom line results, and particularly those around estimated internal migration.

There are some interesting snippets.  The results suggests that New Zealanders’ rates of internal migration (one TLA to another) have been pretty stable, but that of immigrants has increased quite a lot.  The author offers no ideas about why that might have been (and I don’t have any to suggest either).

tsy popn 2 There is a fascinating picture of Christchurch following the earthquakes, including the continuing losses in recent years to neighbouring Selwyn and Waimakariri.

tsy popn 3

And then there is Auckland

tsy popn 4

There was a slight move into Auckland from elsewhere in New Zealand (mostly from Christchurch, see previous chart) in 2011, but otherwise the net flow of New Zealanders has been away from Auckland.  In fact, in the final year of the chart, the net outflow of New Zealanders (this is a NZ-born measure) was larger than the natural increase, so that the entire increase in Auckland’s population is (estimated to have been) due to international migration.

Readers with long memories may recall that I touched on the outflow of New Zealanders (as captured in Census data) in an earlier post.

This was the picture from the five years from 2008 to the 2013 Census.
internal migration 08 to 13As I observed then, we didn’t know what had happened since 2013.   Perhaps things had turned around?    But the new Treasury estimates suggest that if anything the outflow – still modest each year – may have accelerated.

We have the data going further back. Here is the extract from the earlier post.

SNZ has compiled this data back as far as the 1986 to 1991 five-yearly period. The last five yearly period in which Auckland experienced a net inflow of people from elsewhere in the country was from 1991 to 1996.

Here is chart which covers the estimated net internal migration to each region for the period 1986 to 2013 (with the two years 2006 to 2008 missing, because they weren’t captured by any of the censuses).

internal migration 86 to 13.png

 

None of this should be very surprising.   After all:

  • Auckland house prices have become impossibly high,
  • Traffic congestion problems, if temporarily relieved now by Waterview, seem continually pressing, and
  • The gap between Auckland incomes and those in the rest of the country, never large, has been narrowing.

But it must be an inconvenient truth for boosters of the Auckland story, including bureaucrats in MBIE, the Secretary to the Treasury, assorted past and present ministers (recall John Key on “quality problems”).  The people who know Auckland best  –  the opportunities for themselves and their families –  are, at the margin, leaving the place.   People in the rest of New Zealand aren’t (net) flocking to the big city.   It simply doesn’t seem to offer them better opportunities than staying where they are (or going to Australia).

The latest issue of the London Review of Books turned up in the mail yesterday.   In one of the reviews –  of a new book by Richard Florida –  I found this

The new urban inequality has two distinct and related aspects. First, superstar cities have moved ahead of the nations they’re found in.  The trend is clear in the US, where cities like New York have become richer relative to the country as a whole. But it is most pronounced in the UK.  In the 1970s and 1980s, London’s GDP per head was around one and a quarter times that of the UK as a whole.  Today it’s one and three-quarters.

It isn’t just London or New York.   I’ve shown previously a chart looking at GDP per capita in EU countries, looking at the ratio over time of that in the biggest city relative to GDP per capita for the country as a whole.  Over this century there has been a clear upward trend.

As for Auckland, in 2000 GDP per head in Auckland was 15 per cent higher than for the country as a whole, but by last year it was only 9 per cent higher.   I’ve shown previously (a couple of years ago) this chart of how small the New Zealand gap is between GDP per capita in the biggest city and that for the country as a whole, by comparison with many other advanced countries.

gdp pc cross EU city margins

There are, perhaps, some good dimensions to the New Zealand story.   We don’t have whole swathes of the country being left behind as the metropolis powers ahead.  On the other hand, the metropolis isn’t powering ahead at all –  just getting more and more people, in a city which is underperforming a country with weak (almost non-existent in recent years) productivity growth.

It is well past time for a rethink, and for our politicians and officials to start focusing on the specifics of the New Zealand experience.   In terms of economic success, Auckland bears not the slightest resemblance to London or New York (or Paris, or perhaps even Bratislava).   And yet the growth strategy (perhaps flattering it to use the term “strategy”) has seemed to rest almost entirely on a wishful belief that if only we tried really hard, and poured more and more people into Auckland, it just might be.  But one of the lessons of economic geography is that location matters.  Ours –  Auckland’s –  is exceeedingly unpropitious.

That LRB review I mentioned earlier notes that trends in recent decades have turned out to be very good for “established global cities in particular”, in ways that few anticipated.  That particular discussion ends thus

The business districts of San Francisco, New York, and London are ludicrously prodigious. The Borough of Westminster produces as much wealth as all of Wales.

I can’t vouch for that final statistic, but it does leave one thinking that it is more likely that Auckland is a Cardiff or (moving north) Glasgow, than that it is a coming London or New York.