When Sir Michael Cullen’s Super Fund was established, its explicit purpose was to help ensure that superannuation would remain fiscally sustainable long into the future while the population ages.
It’s an expensive scheme. The Government has devoted $15.45 billion to the Fund since inception, approximately $8,935 per household in higher taxes or government debt.
Wisely the quid-pro-quo for taxing New Zealanders much more to fund the Super Fund was that the Fund must be operated completely independently from the political whims of Government. The Fund was justified to the public on the basis that it would make superannuation affordable for future generations: allowing political interference in investment decisions would inherently reduce the Fund’s return and undermine the central purpose of investment performance.
Independence has served the Super Fund – and taxpayers – well. Since inception, the Super Fund has delivered an average return of 10.37 percent per annum, while the fund’s benchmark portfolio has only delivered 8.88 percent per annum on average: equivalent to a $7.6 billion premium in returns. While some economists (including our own Jim Rose) have argued that the Fund’s return merely reflects the high risk investments it chooses, the point is that it is independently managed and performs well.
Except now, the Government wants to kill the Golden Goose.
Last month the Minister of Economic Development David Parker said he wants to seize on hundreds of millions of dollars of the Super Fund to establish an ‘angel investment fund’.
The purpose of an angel fund is to invest in early stage ‘start-up’ companies. ‘Angels’ evaluate these start-ups and determine the likelihood of their future success, and the size of any returns if they are successful. If the start-ups appear to be a good investment opportunity, the fund will buy a stake in the company to deliver funding required for growth.
A well-known example of this investment strategy is Facebook, which received US$500,000 of investment from now New Zealand citizen Peter Thiel in 2004.
Angel investment strategies can be extremely profitable, but they are also enormously risky. For every Facebook there are thousands of scrap-heap start ups that never become profitable. The most adept analysts in the world seek to sort the wheat from the chaff. Most can’t.
Establishing an angel fund is incredibly risky, especially for an agency like the Super Fund investing public money. It does not have the experience or knowledge in the tech start-up world to take full advantage of any available opportunities.
If the Fund is also directed to disproportionately focus on New Zealand investments, delivering good returns will be even more difficult.
Mr Thiel told us last year that the reason he has not invested in New Zealand start ups to the extent that he had hoped is that there are no promising investment opportunities.
More importantly: is the Government best placed to direct the Super Fund’s investments?
The Super Fund is doing a good job at finding investment opportunities and delivering reasonable returns to taxpayers. If adopting an angel investment approach made good economic sense, why does the Government need to direct them to do so? The Fund has more than enough capital to start such a fund on their steam, without Ministerial directives.
If David Parker could do a better job with the Super Fund than its current managers, he should apply for a job there, rather than externally interfere.
Funding the next Facebook or Netflix might be politically appealing for an ambitious Minister of Economic Development, but taxpayers deserve better than to have the Government gamble away their retirement savings.