New Zealand Balks at Pension Payments

New Zealand has joined nations including Latvia and Ireland in putting a spotlight on pension payments in the wake of soaring budget deficits. Comparing the South Pacific country’s behavior to “a person trying to save money by using their credit card,” Finance Minister Bill English suspended contributions to a fund established to help meet the retirement needs of future generations.

“Shifting money from one jam jar to another does not make you wealthier,” English tells Institutional Investor. “We don’t have surpluses to put into the fund.”

He plans to suspend annual contributions of about NZ$2 billion (US$1.3 billion) to the New Zealand Superannuation Fund for at least ten years starting with the 2009 budget, leaving NZ$13 billion invested in global stocks and fixed interest. The fund amounts to about 10 percent of New Zealand’s GDP of NZ$134 billion.

New Zealand, which earns foreign currency from tourism and exports of meat and dairy products, ranks alongside Estonia and Greece at the bottom of the savings ladder among countries in the Organization for Economic Cooperation and Development. Household net savings as a percentage of disposable income is –3.8 percent, more than 9 percentage points lower than the OECD average of 5.4 percent. (U.S. households save, on average, 2 percent of income.)

Critics say the move by New Zealand sends the wrong message to a population nursing a hangover from a debt-fueled spending binge. “Ten years — that’s a long time, that’s a lot of funding,” says Martin Lewington, New Zealand business leader at Marsh & McLennan Cos.’ Mercer subsidiary. When the budget moves back into surplus, “there will be other calls on the national purse.”

Latvia plans to cut pension payments by 10 percent, as part of painful budget measures aimed at winning the next tranche of a US$10.4 billion International Monetary Fund package as its economy slumps. In Ireland, the government is transferring ailing public sector pension funds into the National Pensions Reserve Fund, creating a future cost for taxpayers.

English projects a deficit of NZ$12 billion for next year. In addition to suspending pension contributions, he has deferred tax cuts that were slated for the next two years. His steps helped steer New Zealand away from a credit rating downgrade. Standard & Poor’s lifted the outlook on the AA+ rating to “stable” from “negative” on the day the budget was announced.

The credit crisis and simultaneous recession in the world’s biggest economies exacerbated the impact of high interest rates and a record-high New Zealand dollar, which sapped export returns. The central bank has slashed interest rates to a record low and the kiwi dollar has returned to nearer its long-term average.

The global credit squeeze has hurt a nation where property has been the most popular investment, typically financed via mortgage funds sourced overseas. During the property boom of the early 2000s, New Zealanders felt wealthier and ramped up their credit card debt on consumer goods. The current account deficit sits at 8.5 percent of GDP, up from 4.8 percent in 2003–’04.

If payments had continued, the fund — designed to meet 20 percent of the nation’s pension payments — would have been worth NZ$124 billion by 2031, when it was to begin making payments. Now there will be a NZ$37.5 billion shortfall.