Rewarding Service: A history of the Government Superannuation Fund
University of Otago Press, $39.95,
It is hard to disagree with the opening lines of this book: “In The past three decades superannuation has become one of New Zealand’s most contentious political and social issues.” But while there has, indeed, been a good deal of heated debate around the state pension (New Zealand Superannuation), strangely little attention has been devoted to the demise of private pensions, of which the Government Superannuation Fund (GSF) has been a major representative.
The book takes us through the various stages in the government’s employee pension schemes, meticulously itemising every twist and turn since their tentative origins in the mid-19th century. The GSF itself was not born until 1948, when the various evolving schemes were amalgamated and provisions for all government employees made more uniform. Some groups retained special treatment, however, none more so than the parliamentarians themselves, which might come as no surprise. Atkinson also reminds us of the inglorious “dead of night” seven minutes in 1987, when parliamentarians on both sides of the House passed massive improvements to their own and judges’ superannuation. Notwithstanding these irritations, this account reminds us that the GSF scheme has operated as a labour market tool of fundamental significance, encouraging long service in the public service and allowing state employees to retire with dignity.
It is salutary to be reminded of the long and hard battles over many years for improvements in the GSF. By the early 1950s, it was clear that fixed pensions were being eroded as they were unadjusted for the cost of living. But this issue was not significantly addressed until much later – displaying the government’s perennial fear of the costs of indexation. Some indexation was introduced in 1970, but it was not until the new scheme of the 1980s that full indexation of pensions was assured. It is this aspect of GSF pensions that has been so unique and valuable.
Membership of the GSF peaked in the mid-1970s, when there were over 134,000 contributors and 30,000 pensioners. In part, this membership growth reflected gains under the opt-out arrangements for the New Zealand Superannuation scheme introduced by Labour in 1975. Once this scheme was abandoned and the more generous National Superannuation scheme introduced under Prime Minister Rob Muldoon, numbers began to drop. Supplementary savings for retirement now seemed less necessary for many low- paid employees. The downwards trend had begun and with it grew an increasing awareness that the GSF was designed for a different era. Poor death benefits, long vesting periods and poor portability, with the greatest gains going to long-serving employees, and poor recognition of broken service were all factors in making the GSF look anachronistic.
More seriously, the scheme was never fully funded, with the State finding the extra money for current pensioners from general taxation. Worries about the size of this contingent liability eventually caused the scheme to be closed to new members in 1992.
The book fills a critical gap in the history of private pensions in New Zealand, and provides the basis for tentative lessons to be learned. We have certainly lost the idea of a career public service of which the GSF was a unifying factor. The replacement schemes are fragmented and now cover only a small proportion of public service employees. Very little promotion or publicity surrounds these new schemes, in contrast to the years of heavy promotion of the GSF. Worryingly, there are few indications that the new government has the will to turn this around.
The decline of the GSF parallels the trend, both in New Zealand and internationally, for pension arrangements to shift from defined benefit (DB) to defined contribution (DC). In DB schemes, the employer carries the risk by promising a pension of a given fraction of final salary depending on the length of contributory service. If the assets of the pension fund fail to perform, the employer must meet the shortfall to pay the promised pension. Under the increasingly more common DC schemes, the employees bear all the investment risk. The payout is the accumulated funds and whatever their earnings may be, not a fixed pension. As would-be retirees in the US with DB 401(k) plans are discovering to their chagrin, share-market changes can devastate an apparently secure nest egg in DC schemes.
DB schemes have great social advantages. An ongoing pension cannot be gifted away and also provides for the ongoing costs of old age. The individual, who may have no financial skills, is relieved of the onerous and worrying task of managing assets over an uncertain retirement period. GSF pensions cover both the longevity and inflation risk, something available only to the really wealthy or lucky. But nostalgic preference for DB schemes may not be appropriate in the modern world. In a properly functioning market economy, superannuation handcuffs should not impede the mobility of employees. The shift to defined contribution schemes seems inevitable in light of the increased mobility of employees, both domestically and internationally.
Along with the GSF, company pension schemes are also in decline, and few people are likely to want to purchase an annuity with their cash accumulation on retirement. The annuities market is tiny and there are very few annuities in force, most of which have arisen from buyouts of closing pension schemes or where an employment-based scheme has required members to purchase an annuity with the proceeds. Most other countries are having an increasing national debate around how people should manage their accumulated lump sums throughout their retirement, giving attention to new, improved annuity products. But without government interest and leadership, New Zealand will simply not see a decent annuities market develop.
It might have added interest if Atkinson had supported his factual account with stories of what the GSF has actually meant to members and retired superannuitants. Times change so quickly that we can be unaware of the profound shifts that have occurred and are still occurring. Setting the scheme in the broader context of social change might have led to an exploration and analysis of the gender and family issues. For instance, Atkinson includes a picture of the inaugural meeting of the GSF in 1948. As was typical of the time – although similar boards today show little improvement – the entire cast of directors was male. While the GSF was highly significant for its coverage of women, largely in teaching, that coverage has still never been great. As a female contributor in the teaching profession, I had to withdraw my superannuation when I left teaching to have children. On my return to the university in the early 1980s, I was informed that married women did not have to contribute and it was not necessary for them to do so.
Many of the baby boom generation have parents who enjoy a relatively affluent retirement as a result of an indexed pension from the GSF. My father and aunt, both ex-teachers, have had a total of 67 years of an inflation-indexed GSF pension. The benefits of this have reached down the generations to their children and grandchildren. How few of the baby boom generation themselves will enjoy a private pension, let alone an inflation-indexed one as generous as the old GSF? Are we complacent about inflation because it is so low? Even an inflation rate as low as 2% per annum halves the value of a fixed pension in 36 years. What will happen to the income distribution of middle-income earners in retirement in 2030 compared to today? Should we expect people, with no signals from the State, to know how to manage their lump sums?
It is not just that few members of today’s workforce are covered in pension plans: few have access to any employment-based scheme at all. Including the state sector, only 15% of the employed workforce belong to a scheme. Inexorably, as the result of tax changes and neglect, and because the State itself has no longer played a leadership role, employer interest has declined. Yet workplace savings schemes are one of the best ways to ensure regular savings plans are put in place. We have allowed them to crumble. Perhaps this book will cause us to ask whether this is what we really want, and whether the government itself as an employer should be leading the way back.
Susan St John teaches in the Economics Department at the University of Auckland.