Revisiting the NZSF

There have plenty of stories in the last couple of days about the expressed wish of the New Zealand Superannuation Fund to become owner, or part-owner, of new light-rail projects.

There has been a range of reactions, from the gushingingly enthusiastic to the rather more sceptical.  Count me at the extremely sceptical end of that spectrum.  In fact, it is the sort of story that confirms – again – my longheld fears about NZSF.

Towards the gushing end of the spectrum was Stuff politics journalist Henry Cooke, whose piece ran under the heading “Super Fund gives huge vote of confidence to light rail plans”, when it is nothing of the sort.

This is a massive vote of confidence in the viability of the project from some of the savviest investors in the country.


Their proposal would see another huge sovereign wealth fund – Quebec’s – join them in a consortium to build, operate, and own the lines in perpetuity. Exactly how they would get a return on that investment is unclear at this point,

No doubt this is true

Politically this is already a win.

And even Cooke recognises the political nature of all this

By making a proposal on such a political project the Super Fund is making something of a political bet

Concluding that

For today though, this is a vote of confidence from the kind of person left-wing governments usually find it very hard to get votes from: high powered investors. They’ll take it with a smile.

I’m sure the government is delighted.  As their predecessors were when the NZSF and ACC teamed up –  off-market of course – to take part-ownership of Kiwibank, without actually providing any fresh expertise, and in the process reducing the transparency and accountability around (what is still 100% state-owned) Kiwibank.  But in the end these are votes of confidence from public servants, who know which side their bread is buttered on.

As I’ve written about here previously, NZSF aren’t great investment gurus.  They’ve made quite a lot of money taking big risks in a strongly rising global market, but the returns relative to risk, or to taxpayer’s cost of capital haven’t been particularly attractive and –  as even NZSF will acknowledge –  markets go down as well as up.   As for light-rail projects, the NZSF statement noted that around 2 per cent of the Fund is in infrastructure assets worldwide.  That doesn’t suggest any particular expertise in light-rail –  and they don’t point to any in the statement.   And almost any government project can be made viable for an investor if the associated contracts are skewed sufficiently favourably in the investor’s direction.

So this unsolicited (but no doubt welcome) expression of interest isn’t any sort of vote of confidence, and is probably better seen as a fishing expedition, doing what the Fund seems to be good at, playing politics.    Perhaps under the heading of “it is New Zealanders’ money” the NZSF can get a better deal from the government than others might (as NZSF and ACC presumably got a good value-transfer deal on Kiwibank, since no one else was allowed into the mix); perhaps the government might like the idea of an “arms-length” investor rather than putting in money directly and being directly accountable for the results.  Perhaps it will all come to nothing, but NZSF will have shown willing, and earned itself more political brownie points.

We also saw NZSF playing politics last year, with their decision to substantially reduce the carbon exposure in their portfolio.  Reasonable people might debate the economic merits of the judgement they took (I never found the arguments in the internal papers they released overly persuasive), but if it was simply an active management issue –  a bet on where markets would go over the next few years –  they’d have left their benchmarks unchanged, and enabled citizens to monitor risk and return on the punt they’d made.  They didn’t of course –  they claimed credit for the speculative call (which was no doubt popular with many voters, and with Labour/Greens –  and buried it in the benchmark itself, in ways that make it very hard for anyone to check whether it was a good economic call. I wonder if they are even monitoring it themselves, or whether they even care.

On the specifics of the latest NZSF initiative, my view was much closer to this

Retirement policy expert Michael Littlewood said he groaned inwardly at the news the Super Fund wanted to fund two new light rail networks.

He said light rail had a reputation for never finishing on time, cost over-runs and not making money unless it was subsidised by the taxpayer.

“Is this going to add to the security of New Zealand’s future payments of New Zealand Superannuation? I would have thought not.”

Littlewood said the Super fund was taxpayers’ money and if the rail was going to be paid for by taxpayers it should be done so directly.

“I’m not sure what the Super Fund adds to this process.”

Littlewood who co-authored a report last year that called for the fund to be dismantled, said private investments such as this would make that harder to do.

If there was ever a case for NZSF – something I’m not persuaded of (preferring the government to simply run down its debt, and leave investment risk-taking to citizens and private entities) – it had to involve scrupulously avoiding domestic politics.  It was the attraction of a passive approach to investment (hugging the respective indexes which –  among other things –  keeps costs down), mostly in offshore market.

Avoiding politics was always only going to become harder as the Fund got bigger.  I recall during the 2008/09 recession –  when the Fund was smaller than it is now –  the number of idealists and opportunists who were dreaming up schemes that the money in the NZSF could be steered towards.  It will be the same next time round, and the path NZS has been going down over the last few years of its own initiative –  Kiwibank, carbon, and now light rail –  will only increase the risk. And the pressures come from both sides.   People outside will badger governments and the Board/management with clever schemes.  On paper, NZSF is well-insulated.   But people in management and on the Board will have incentives to want to be well-regarded in the community, to be players, and to win and retain political allies.  For not many of them – Board or management –  will these not be the last jobs, last appointments, they are pursuing.   And if they can do it with sweetheart deals –  serving the interests of the government of the day, and of the Board/management but not necessarily the people of New Zealand – all the better for them individually: the return numbers can continue to be flattered, even though some of its returns to connections and to lobbying (often just a transfer among different taxpayer pockets, with lots of fees dripping off the side), not to raw investment expertise.

I’ve written in several recent posts about insights and arguments from the new book, Unelected Power, by former Bank of England Deputy Governor, Paul Tucker.  Tucker’s own expertise is in central banking, but part of the value of the book is in the way he seeks to develop a framework for thinking about the conditions under which it does, and doesn’t, make sense for government functions to be delegated to independent agencies, and the sorts of accountability mechanisms that need to be in place when such delegations are made.   Reflecting on Tucker’s delegation criteria, NZSF increasingly fails that test.

Tucker’s first criterion is whether the goal can be specified.  NZSF probably passes the test: the goal is something like maximising medium-term risk-adjusted returns.

But the second is more questionable:  “Society’s preferences are relatively stable and concern a major social cost”.   Even sticking to narrow business of investment, it isn’t clear that preferences are stable.  Sticking the money in, in effect, a big index fund is one thing, but plenty of people don’t (now) want carbon exposures, others don’t want whale exposures, others still won’t want weapons exposures, or tobacco exposures.  And others just won’t care.  (Views on NZS itself, of course, vary widely, even in the same political party from election to election.)

That relates to Tucker’s fourth criterion, that the independent agency will not have to make big choices on distributional trade-offs or society’s values, or that materially shift the distribution of political power.  When there is a big pot of money that politicians can quietly encourage their appointees to steer in ways that serve political ends, the case for independence is pretty weak.  No one is compelled of course, but it is a case of a double coincidence of desires.

The third criterion was “is there a problem credibly committing to a settled policy regime?”.  This was a key argument for an independent central bank.  It isn’t obviously an issue when it comes to an investment fund of this sort (where the amounts put into the Fund are determined politically).

The fourth criterion is not that relevant here: is there good reason to expect the policy instruments to work, with a relevant community of experts outside the institution.  Active management won’t make much money (if any) except by chance, but passive management can be expected to generate returns commensurate with the risk taken.  Unfortunately, of course, risk to the independent agency’s returns can be mitigated by within-government favourable deals.

The sixth criterion is that the legislature should have the capacity to oversee the independent agency’s stewardship adequately, and to assess whether the system is working adequately.  In almost no instance do our parliamentary committees provide the sort of effective scrutiny this sort of regime really requires for the cause of democratic legitimacy (a point I want to come back to on the Reserve Bank case).  NZSF doesn’t seem to be any sort of exception.

Politicians will make calls –  good and bad.  Often enough they will waste our money, perhaps with the best intentions in the world.  Sometimes they’ll do good with it.  But the key consideration there is that we can toss the politicians out –  or re-elect them if we reckon they are doing a good job.  We have no such ability to discipline the management or the Board of the New Zealand Superannuation Fund.  That is, of course, by design –  it is how the legislation is set up –  but it doesn’t make that design any more appropriate or legitimate.  And the behaviour of the Board/management indicates that this isn’t just a theoretical concern, but a practical one.  Anyone can see this light rail expression of interest as, in no small part, a political one –  even enthusiastic Henry Cooke recognised that.     That should be no business of an allegedly apolitical government agency, but the corrosive incentives –  such a big and growing pot of money to manage, so many vested interests keen to profit from dealing with the Fund –  seem to make it all but unavoidable.

We don’t need a New Zealand Superannuation Fund: the Crown has no vast stores of net financial wealth that need managing, the risk-adjusted returns are no better than average, and despite the name the Fund is just another pot of government funds, doing nothing for the affordability of public pensions.  All too much power –  over your money and mine –  is vested in the hands of people who themselves face little or no effective accountability, and such accountability as they may feel seems more often served by responding to the interests of governments of the day (of whichever stripe), or feel-good public moods.  Money-pots are dangerous things, in the hands of politicans or those who see their interests aligned to preferences of politicians.  As Michael Littlewood argues, and as I’ve argued previously  – it is past time to wind up the NZSF, using the assets to repay government debt.    If it is to be retained, the mandate should be revised to require them to stick closely to relatively liquid traded assets, and ones with little or no connection to New Zealand governments.