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.


26 thoughts on “Revisiting the NZSF

  1. I think the super fund will pay for 12% of the cost of universal superannuation but raising the eligibility age to 67 reduces its cost by 10%. All the fund does is put off the day in which the eligibility age is raised to 67


  2. I would imagine that the NZ Super Fund would have observed the truck loads of money that Macquarie bank has invested and then generated in Oz infrastructure e.g. Sydney Airport.

    If they can obtain those types of long term income deals whilst at the same time investing and building out NZ’s infrastructure, can only be of benefit.


    • Macquarie, like the private Super and Sovereign funds in Australia, prefer to invest in already-built infrastructure and only when the expected returns are appropriate. They have piled in to the asset class over the past 10 years due to extremely low cost of financing (debt and equity) vs expected returns. They also like the cashflow yield nature of the returns – it is in effect a debt-like exposure.
      Infrastructure development is a different game with higher returns required to reward different risks, and different expertise needed to execute well.

      And at this point in the cycle (assets now highly priced due to the above mentioned buyers all piling in given low cost of finance) you actually see offshore funds becoming more cautious about new infrastructure investments. Value is highly (inversely) correlated to debt yields so as these creep up in the medium term…[cue threatening background music]

      The Australian Future Fund has an interesting take on what their priorities are. The article below makes for interesting reading and includes a full speech from the CIO:

      It looks like their current preference is to invest in the areas that reflect generational change and technological disruption, hence they have a big exposure to venture capital and growth equity. According to the CIO, this allows them to not only access the return profile from disruptive companies, but also get insight from the portfolios into new tech coming down the pipe (know what industries will be disrupted and investments to avoid) and better underwrite other investments (ie when you model infrastructure investments on 30 year cashflows, you better be aware of the impact of everything from autonomous vehicles, drones, and 3d printing, to AI and virtual working tools).

      I notice NZ Super also announced an investment into an “Uber for Waste” business today. Interesting company disrupting the trash collection business in the US, but a quick google search shows this is a very late stage investment into a business that had already hit ‘unicorn’ status ($B valuation) some time ago and already had investment via industry giant Suez and other investors like Goldman Sachs etc.

      Looks like NZ Super is at the end of a very long chain of investors getting offered stakes in companies in markets far away (lemon risk?), and it’s a shame they aren’t doing more helping build NZ unicorns given surely they would be near the front of the queue closer to home – we have a great one in Rocket Lab and lots of other evidence of fantastic start up companies that have done quite well (Trademe, Xero, Pushpay…)


  3. Auckland International Airport is one enormous beneficiary from the light rail program

    Don’t see AIA putting their hands up and offering to participate in the funding

    Whoever the responsible agency becomes it should put two leg ropes around AIA and charge them an annual royalty in respect of the benefit gained. If they don’t then I will predict that on completion of the rail system out to the airport, the value of AIA will soar into the stratosphere and will be realised by AIA shareholders.

    The government needs to get its capital-value-capture scheme operating beforehand


  4. Apart from the financial risk the concept of light rail is becoming more and more problematical. Developments like battery/ supercapacitor/ hydrogen fuel cell power as well as autonomous and railless guided multi unit buses are coming. Who would want to travel from the airport at rush hour with luggage on trams stopping well in excess of 20 stops is beyond me. The alternative heavy rail connection stops less than half as many times and has roomy carriages as well. I can remember the Auckland trams and have also traveled on London underground from Heathrow with luggage.
    Time for a rethink

    Liked by 1 person

    • It’s not just to the airport. It services the entire area between town and the airport. The airport is just the terminus.

      Running a heavy rail spur to the airport would create an effective airport-only train, because it would be capacity constrained by the southern rail, which is rammed with freight and passenger trains as it is.

      Guided bus units and other blahblah has “been coming” for awhile now, but light rail exists now.


    • Doesn’t matter whether its Dominion Rd across Hillsborough through Onehunga solution, or the heavy rail solution via Puhinui, the announced purpose is to ease the way for travellers between Auckland CBD and the Auckland International Airport

      Of course AIA will be a beneficiary, regardless of its monopoly status. Macquarie Bank will be sniffing around soon. They love infrastructure monopolies


      • With 19 million inbound and outbound passengers out of the airport, the primary beneficiary would have to be AIA. Single houses suburbs throughout the journey would mean stops with one or two people coming on or getting off in between. To make it viable there have to be few stops in between and therefore not really viable for suburban use.


      • Perhaps I’m missing something but I don’t see how AIA benefits. Will more people fly? I’d be surprised. There is clear benefit to some passengers (relative to current bus or taxi options), but probably nowhere near enough to make it economic.


      • More likely the disruption to road traffic will create a net loss to terms of actual access. AND, incorporating rail-based modes within airport campuses is hellishly complex and costly.

        This whole proposal is political, utopian, away-with-the-fairies, la-la land stuff. No-one of sound mind could actually know their stuff on all this and still actually support any such proposal.


  5. It’s more complex than that

    First of all have you ever seen any research (any?) into the cost to AIA and Airlines and Government agencies (manpower costs) when there is a single vehicle smash in or around Auckland CBD or the inner-central carriageways of the 3 motorways Southern, North-Western, or Northern Motorway when the entire area becomes gridlocked and comes to a standstill for 3 or more hours. Take the worst case scenario. It brings private vehicles, buses and taxis to a halt. Forget about getting to the airport on time and catching your flight

    It boils down what is the purpose of the CBD-AIA capital investment? Why? What is the purpose of it all

    Read the AT fluff-piece

    Its almost as motivational as the Education NZ fluff-piece the other day
    Standard immeasurable puff stuff “Auckland is growing, bringing diversity, vibrancy and opportunity”
    Gotta love those diversities and vibrancies

    The Airport Mangere Rail is a little more objective
    There are 33,000 people who work out there everyday – a tragic arterial smash prevents their attendance at work hindering the processing of a shrunken travelling public

    We get 3½ million inbound tourists each year. Most of them arrive in a 2 month window of December-January. Most of them arrive through Auckland Gateway. Today it is announced that the number of arrivals is about to rise to 5 million

    Some solutions are essential. It is hoped to reduce congestion on the arterial roadways to make travelling to and from and around the airport easier


    • Where has it been proven that light rail reduces road congestion???

      Show me any example, and I guarantee it will involve 100% separate rights of way for the trams, and grade separated cross-direction conflict resolutions; not lunatic “repurposed” already-scarce road space.

      Actually contrary to the lies that have been getting entrenched for decades, the only thing that correlates with congestion is road space per capita. The next most effective factor is the fiscal incentives on the direct cost of driving (affected by fees, petrol taxes, etc). Public transport is a money-wasting sideshow. The correct way to look at it, is the subsidy cost per person-km of travel; realistically it needs to be considered what will be the impact of increased aggregate costs due to this factor, on other local government (and even central government) budget responsibilities.

      I just read a good analysis of some activist journalists figures advocating more spending on public transport in the USA, which was anguishing that roads have had 30 times as much money spent on them as there have been “investments in public transport systems”; the analysis pointed out that this completely ignored the operating costs of the public transport, which are orders of magnitude greater than the public costs of “operating” roads (car drivers pay their own costs of vehicle, energy, repairs etc); AND that 900 times as much person-miles of travel occurs on the roads.

      The hated Los Angeles, has for the last 30 years been spending around 1/3 public transport, 2/3 roads (and this is still evil according to the car haters); and the public transport mode share of travel has remained below 3%. This is fiscal “rocks in head” stuff.


      • You are right. Light rail without adequate separation is pointless.

        Luckily, this is planned to be separated for the entire route. The only exception is in the village centres, where it’s not in a separate lane, but stoplights will separate by time. IE – traffic is stopped so the train can roll through.


  6. Thank you for the post. The significant message isn’t ‘light rail’ but “”Money-pots are dangerous things””. Please keep returning to it.

    Years ago in PNG a colleague explained how the money he had been forced to put into a public service investment fund over 20 years had halved (my guess was he had lost over 90% of potential return). Stories about PNG and unwise hands on money-pots are hair-raising and sadly common. However what is different between PNG and NZ? Melanesians are as intelligent and honest as Kiwis (my experience would be more so); they have unequaled cultural diversity and could teach Auckland council what ‘vibrancy’ really means. So the differences are only education, tradition, shared history and sophistication. What has happened with the public’s money in PNG could happen here except it would be far less blatant.


    • Ah, the Public Officers’ Superannuation Fund……that brings back memories (of bad investment choices and pressure to get involved in dodgy projects, even all those decades ago.


    • It actually IS “light rail” as well, in so far as nothing is greater proof that a “pot of public money for investment” is dangerous, than a proposal to invest it in light rail.

      Light rail is a true “Concorde Project” almost everywhere (if there are exceptions they are special cases and under 1% of the total global light rail).

      That is, a Concorde project NEVER “pays back” at any stage. None of the money “invested” EVER achieves a “return”. There are costs of development, costs of construction, and costs of operation. When the eventual fare revenue is below the costs of operation, you have a Concorde Project. And light rail on average is a fiscal disaster; the expectations are that high capital costs relative to buses are offset by lower operating costs; but as with everything about light rail, this is a myth.

      If there is an “investor” getting a “return”, this is ALWAYS at the expense of the subsidizers of the system.

      Bent Flybjerg et al, who have been publishing meta-studies of transport infrastructure investments for decades, use the terms “strategic misrepresentation” and “optimism bias” to describe what is going on. They suggest that every new public proposal needs to be “adjusted” by factors which are an average of the inaccuracies in “projections” in past global experience. Ironically even the optimistic data is always bad enough that no sane public would tolerate it if they were given the facts; but “being given the facts” is dependent entirely on there being dedicated members of the public who devote massive amounts of their own time and resources to getting the facts out. The government doesn’t; the “right wing in name only” major parties at the national level don’t get the facts out; and the mainstream media seldom does. (Watch National in NZ end up capitulating on this).


  7. The main change in PNG (not that I have been there since 2003) is an ever growing middle class and the use of social media.

    How do we keep NZ immune from its own dodgy projects? I suspect our establishment is less afraid of God’s eventual judgement than previous generations. So we depend on the rule of law but is the law adequately resourced and fast enough? What prevents potential perpetrators simply leaving the country if they do not have significant family ties to NZ? Do we over trust our long held reputation for being corruption free?


    • Make the individuals personally invest in the projects. This is the biggest flaw in the NZ Super and other government fund models. Private funds make the managers put their own skin in the game. Absent this it’s bet the farm stuff with no consequences.

      Liked by 1 person

      • Usually you would call this a major conflict of interest. So when the investment turns sour who exists first? Your personal investment or the client?


      • GGS, actually no conflict at all. Quite the contrary – it’s pure alignment. Everyone is locked into the investments together so if value goes down the individuals take a loss too. Nothing sharpens the mind like value at risk.


      • This is how conflict of interest works if you are not aware. Say I am a trader and I have personal shares in Fletchers. I invest client funds also in Fletchers. Recently Fletchers price took a dive. Concerned with the fall in price I place an order to sell at a loss but suddenly there is a rebound in Fletchers price just yesterday on the news but I already have an order to sell. Who do you think will take the hit? The broker or the investor?


  8. Mike
    I have been reading the prod com climate change report on my phone (inParamaribo) .the supefund made a big submission._ probably worth look
    One thing I don’t understand is that the fund made a strategic investment in dairy farms based on their long term inveztment potential how does that square up?
    Also I would like to communicate on the climate issue directly but don’t have your email Could you email to


  9. Assuming 1) and 2) are a given (they may not be)

    1) Government/Auckland Transport will construct the light rail line irrespective of the business case. (also noting that t will always require financial subsidy irrespective of whether it has socioeconomic benefits for NZ)

    2) The PPP is very well structured so that the government doesn’t have to bail out the operator & the operator is not making excess profits

    then the choice is between the lesser of two evils

    a) Taxpayers / ratepayers fund an overseas investor who syphons off the guaranteed operating profit overseas

    b) A merry-go-round where taxpayers/ratepayers additionally fund returns of NZSF effectively reducing its rate of return (as the taxpayers are initial funders as well).


    • Talk to Fletchers about how the government screws down the supplier on infrastructure projects. A billion dollar loss on government projects. I don’t think there will be too many NZ companies that will become involved in government projects from this experience. You either go to the Chinese who are prepared to wear losses for strategic entry or nothing gets done.


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