Cullen on 1st reading of the NZ Superannuation Bill

  • Michael Cullen
Finance

Michael Cullen: 1st Reading NZ Superannuation Bill

Mr Speaker, I move that the New Zealand Superannuation Bill now be read a first time.

· New Zealand's population is ageing.

· The proportion of the population aged over 65 is expected to increase from the current 12% to 25% by 2050. This reflects not just the 'baby boom' generation moving through, but also the effects of increasing longevity and decreased fertility. It is a permanent shift in the age structure of the population.

· Under current arrangements, annual payments of NZS are expected to rise from their current levels of about 4% of GDP to around 9% of GDP over the next fifty years.

· If we do nothing to prepare for this future, the sustainability of New Zealand Superannuation will be called into question.

· NZS will require an increasing proportion of government expenditure, when there are less people in the workforce to generate the income to pay for it.

· Although there are currently about 6 working age people per superannuitant, by 2050 there will be only be about 2. It is both unfair and unrealistic to expect that relatively small working age population to have to meet these costs through their taxes at the time, especially while we are much better placed now to save for those future costs.

· This is an important issue as NZS is a significant element of the retirement income of most superannuitants and the sole source of income for nearly half of those aged over 65 years.

The Solution

· This Bill addresses the challenge posed by the ageing population by establishing the New Zealand Superannuation Fund. The Fund enables us to smooth the future increase in the cost of superannuation over time.

· The Fund will build up for around the next 25 years in order to meet part of the costs of NZS in the future.

· The Fund will allow us to maintain a universal pension that guarantees a basic minimum standard of living for superannuitants.

· It will finally give superannuitants some certainty about what the government will be able to provide for them. And they will know that they have to provide for themselves if they want a higher standard of living than NZS offers.

· And by requiring the government to set aside funds for the future now, it will ensure that these long term cost pressures are taken into account in annual fiscal decisions.

· Sound fiscal management will be key to ensuring the government can make the required contributions to Fund and meet its other fiscal priorities.

· The Bill brings together legislation on both New Zealand Superannuation entitlements and funding arrangements. It also provides a process for political parties to sign up to either entitlements or funding arrangements, or both.

At the conclusion of this speech I intend to move that the New Zealand Superannuation Bill be referred to the Finance and Expenditure Select Committee for consideration. I also will move that the Finance and Expenditure Select Committee report back on the New Zealand Superannuation Bill by [31 March 2001].

Entitlements
· Part one of the Bill sets out New Zealand Superannuation entitlements.

· The Fund will provide for both current and future payments of New Zealand Superannuation entitlements.

· The establishment of the Fund does not require us to make any changes to entitlements.

· Indeed, the entitlement provisions have been carried forward from existing legislation with only one substantial change.

· That change is the increase in the wage floor for the married couple rate of New Zealand Superannuation from 60% to 65 %.

· This has been the Government's intention since the election and it is something that we have already implemented in practice.

· This change in the legislation simply formalises the increase in the wage floor.

Funding arrangements
· The second part of the Bill covers the funding arrangements for the Fund.

Establishment of the Fund
· The Bill establishes the New Zealand Superannuation Fund, which is to be used solely for the purpose of the payment of New Zealand Superannuation.

Capital Contributions
· Each year, the Treasury will be responsible for calculating the annual contribution required for the Fund.

· The annual contribution rate will be calculated on a forty year rolling horizon.

· The annual rate will be one fortieth of total cost of New Zealand Superannuation over the coming forty years as a percentage of GDP.

· The Treasury will include the calculations of the annual capital contribution and the assumptions behind the calculations in the annual Budget and Economic Fiscal Update.

· In most years, I expect that the government will pay this level of contribution to the Fund.

· Should a government decide not to contribute at the required level reported in the Budget and Economic Fiscal Update, the Minister will be required to include in the Fiscal Strategy Report an explanation for the departure.

· This would outline:

Ø the reasons for the departure from the amount specified in the BEFU.

Ø the amount that will be paid into the Fund and a statement of the approach the government intends to take in future to ensure that the Fund will be sufficient to meet the future costs of NZS entitlements.

Ø the government's intentions regarding future contributions to the Fund.

· These requirements provide a transparent process for deviations from the required contribution.

· This process is consistent with the approach taken for other fiscal objectives in the Fiscal Responsibility Act.

· Where the government of the day decides to pay less than the required contribution to the Fund, it will be required to at least pay in sufficient funds to provide for the current cost of New Zealand Superannuation entitlements in that year.

· It will also be possible for future governments to make additional payments into the Fund.

Withdrawals from the Fund
· The legislation prevents any capital withdrawal being made from the Fund prior to 1 July 2020.

· After that date, capital withdrawals may be made in order to contribute to New Zealand Superannuation costs.

· However, this will only happen if New Zealand Superannuation costs are greater than the contribution rate.

Guardians of New Zealand Superannuation
· The Fund will be managed by a separate Crown entity board called the Guardians of New Zealand Superannuation on behalf of the Government.

· The Board will operate independently from the Government.

Board of the Guardians
· To ensure the achievement of the Fund's objectives, Board members will be appointed on the basis of their expertise in the management of financial investments.

· A nominating committee will be established to identify appropriate candidates for Board membership. As part of the process for identifying suitable candidates, the committee will consult with organisations that have an interest in the appointments: for example those representing older people, employees, employers and the savings industry. The nominating committee will provide a shortlist of candidates to the Minister of Finance, who will then consult with representatives from other political parties before making the final recommendation to the Governor General for appointment.

· This is a much more arm's-length process for the appointment of board members than that currently in place for other Crown entities and SOEs.

Investment of the Fund
· The Board will be responsible for the determination and execution of the investment strategy for the Fund.

· They will be required to manage the Fund on a prudent commercial basis - in a manner that is consistent with best portfolio management techniques, and consistent with maximising the Fund's returns without bringing undue risk to the Fund as a whole.

· In addition, investment decisions must be consistent with ethical considerations. The investments undertaken must therefore uphold the reputation of New Zealand as a responsible member of the world community.

· The Fund will be subject to normal taxation rules.

Ministerial Direction
· Because the Board will be independent from the Crown, it will be required to have regard to rather than give effect to directions from the government. There is therefore limited capability for the government of the day to make directions and those that are given must not be contradictory to the Fund's prudent commercial investment rule.

· Any directions that are given will be transparent, as the Minister must present a copy of the direction to the House of Representatives.

Accountability
· To create the proper incentives for the achievement of the Fund's commercial objectives, the Guardians will be subject to accountability and monitoring provisions.

· These provisions require the Board to prepare a Statement of Intent that sets out the expected performance of the Fund over the next year, a statement of the key risks that relate to that performance and the actions the Board will take to manage these risks.

· The Statement of Intent will also include financial statements for the next year.

· The Board will prepare an Annual Report that sets out the outcomes in each of these areas.

· The Audit Office will be the auditor of the Fund and the Guardians.

Performance Reviews
· To ensure the Guardians are effectively managing the Fund and maintaining a high standard of financial achievement, independent review of their performance will be conducted at no less than 5 yearly intervals.

Political commitment to New Zealand Superannuation
· It is important that broad political support is given to this legislation, as security in retirement is an important issue for all New Zealanders.

· Part 3 of the Act therefore sets out a process for political parties to sign up to the provision in Part 1 on entitlements, Part 2 on funding arrangements or both.

· A leader of a political party represented in Parliament may notify the Minister of its agreement to the relevant Part of the legislation.

· The name of the Party will be added to Schedule 4 of the Act.

· If the government of the day intends to make any changes to the legislation, it must consult with the signatories to the relevant Part of the Act before it does so.

· The time frame for consultation will be at least 90 days.

· This will allow adequate time for the effects of any proposed amendment to be examined by the signatories.

· There has been some discussion as to whether the scheme should be arranged in the form of individual accounts at some time in the future.

· While this would be a significant shift in policy from the scheme outlined in this legislation, we recognise that it is an important issue to some and so we have made provision in the Bill for a possible amendment that would consider this.

CONCLUSION

I am very proud of the robustness of the design of the Super Fund. While I don't rule out further fine-tuning of how the Fund will operate, I think we have a sound framework that is politically, economically and fiscally sustainable, and that will allow us to move forward with confidence.

I believe this Bill represents the best chance we have of putting an end to the uncertainty that has marked retirement income policy for the past quarter of a century. I commend this Bill to the House.

I move that the New Zealand Superannuation Bill be referred to the Finance and Expenditure Select Committee for consideration. I also move that the Finance and Expenditure Select Committee report back on the New Zealand Superannuation Bill by [31 March 2001]. (Following this speech, written notice of the instruction to report back by 31 March 2001 must be delivered to the Clerk at the Table)