Parliament has dented NZ Superannuation Fund (NZS) hopes of achieving tax-free status in its latest annual review of the $40 billion plus entity.
The Finance and Expenditure Committee (FEC) “expressed scepticism” about NZS arguments for removing tax obligations for the fund.
According to the FEC report published last week, NZS “appeared to want both a higher Government contribution to the Fund and no tax”.
The final Tax Working Group (TWG) report, tabled this February, flagged the option of shifting NZS to the tax-free status currently enjoyed by the Accident Compensation Commission (ACC) fund, which also has about $40 billion under management.
However, the FEC report cites a Treasury response to the TWG proposal claiming a tax-exempt NZS would lead to a “loss of flexibility” for the government.
“If the Fund is paying tax, the Government could reduce or suspend contributions and still have a source of revenue to pay for public goods and services, without raising other taxes or borrowing,” the FEC report says. “This is not the case when the Fund is not paying tax.
“We pointed out that for direct investments in the economy, if the Fund is not taxed, it has a competitive advantage. It may therefore be harder to compare how it is performing against others in the market.”
In an earlier paper supplied to the FEC, NZS chief Matt Whineray, says cutting tax on the fund would have no effect on government contributions until June 2022.
But post 2023, when higher government contributions kick in, then a “zero tax rate would have an immediate impact on the model, with the result that the required contributions would be lower”, Whineray says.
“The lower contributions would (approximately) be offset by tax no longer received from the Fund,” he says. “The Government’s books would neither win nor lose through this change in approach; the advantages of the tax exemption are that the Fund:
- no longer has to bear the deadweight losses of tax compliance costs;
- can potentially obtain some sovereign tax immunity benefits offshore; and,
- as a long-term savings vehicle, does not suffer ‘withdrawals’ in the form of NZ tax should contributions be suspended by the Government again.”
Whineray also told the FEC that the NZS was reviewing its structure in light of anticipated higher government contributions to the fund.
“This work involves a consideration of which of our current investment activities are easily scalable and which are not; and which investment opportunities are suitable for in-house management, and which are better out-sourced to external investment managers,” he says in the written response. “This work is continuing.”
NZS employs about 130 people with plans to recruit more over this financial year to bolster the investment team, Whineray says.
Last week NZS revealed a new $115 million direct investment in US data centres to be managed by CIM Group while also divesting seven weapons manufacturers from its portfolios in a move that saw a $19 million stock sell-down. NZ Super’s exclusion list is commonly used as a template by other local fund managers. Soon after the NZS move, AMP KiwiSaver also revealed it would cut direct investments in weapon manufacturers.
The gun-maker exclusion follows a NZS-led initiative to pressure Facebook and other social media firms to improve control in the wake of the Christchurch mosque killings this March.
Meanwhile, a similar annual review of the ACC by the Education and Workforce Committee, also published last week, notes an Auditor-General recommendation that the insurer’s $40 billion investment fund needs to “improve its systems for valuing and benchmarking its investment performance”.
In response to Committee questions, the ACC says consultancy firm EY identified some “minor improvements” to the fund’s valuation methodology of some assets not covered by third-party custodian, JP Morgan. ACC values a “small portion” of assets in-house, such as private equities.
The EY report, conducted as part of the Auditor-General’s review, also suggests the ACC fund could improve its benchmarking practices.
“ACC relies on manual spreadsheets to measure our investment performance against benchmarks, and also in preparing a number of financial statement reporting disclosures,” the official response says.
“Given the size and complexity of the ACC investment portfolio, EY believes that these processes should be managed through core technologies, rather than by manual spreadsheets.”
Elsewhere, ACC chair, Paula Rebstock, told the Committee that annual fund returns of about 10 per cent would be hard to sustain in the future. The ACC fund would have to grow by about 5 per cent each year to cover liabilities, Rebstock said.
“We’ve gotten very comfortable with very high returns, but financial markets are quite volatile at the moment, and I’d just say to you that, at the end of December, we were well behind budget on our investment returns,” she said. “By the end of January, we were well ahead. It’s extremely volatile right now, even in a fund that is on the conservative side in terms of risk. At present, we’d say to you that forecasting the next year’s end result is really very difficult in the current market.”