This Selected Issues paper conducts a comparative analysis of the main determinants of GDP per capita growth in New Zealand and in other OECD countries to assess the relative importance of macroeconomic factors, institutional settings, and geographical location in New Zealand’s growth performance during the last 30 years. The estimation results find strong support for the view that geographical isolation has significantly hampered growth in New Zealand. The paper also reviews the international experience with prefunding public defined-benefit pension schemes, with a focus on recent reforms in industrial countries—Canada, Ireland, Norway, and Sweden.


This Selected Issues paper conducts a comparative analysis of the main determinants of GDP per capita growth in New Zealand and in other OECD countries to assess the relative importance of macroeconomic factors, institutional settings, and geographical location in New Zealand’s growth performance during the last 30 years. The estimation results find strong support for the view that geographical isolation has significantly hampered growth in New Zealand. The paper also reviews the international experience with prefunding public defined-benefit pension schemes, with a focus on recent reforms in industrial countries—Canada, Ireland, Norway, and Sweden.

II. New Zealand Superannuation Fund: International comparisons and Economic Implications16

D. Introduction

1. As in other industrial countries, New Zealand faces significant spending pressures related to population aging. The old-age dependency ratio (defined as the ratio of people at age 65 and older to that of people at ages 15-64) in New Zealand is projected to more than double in the next 40 years, based on the latest projections from either the World Bank or Statistics New Zealand (Figure 1). According to estimates by the New Zealand Treasury, these demographic changes imply that the net cost of New Zealand Superannuation (NZS)—the government-funded public pension scheme—will increase from about 4 percent of GDP to 9 percent of GDP during 2000-2050.17

Figure 1.
Figure 1.

Old-Age Dependency Ratio


Citation: IMF Staff Country Reports 2004, 127; 10.5089/9781451830255.002.A002

Source: World Bank and SNZ (Projections from Statistic New Zealand).

2. To smooth the impact of increasing public pension payments on fiscal balances, the government has established the New Zealand Superannuation Fund (NZSF) to partially pre-fund the future obligations of NZS. The NZSF, which is entirely funded by the government, commenced its investment program on October 1, 2003 after receiving initial funding of $NZ 2.4 billion. The government is currently expected to continue making net contributions to the Fund through 2025, with no withdrawals from the Fund explicitly mandated by legislation before July 2020. During 2003-20, the government expects to contribute an average of $NZ 2.3 billion per year (1.2 percent of GDP on average). The Fund is governed by an independent Board of Guardians, which is charged with managing and administering the NZSF in a prudent and commercial manner consistent with best-practice portfolio management, maximizing returns without undue risk to the Fund as a whole, and avoiding prejudice to New Zealand’s reputation as a responsible member of the world community. The Guardians are responsible for establishing investment policies and standards and procedures for the NZSF. With an objective of achieving average annual returns, before tax, exceeding 2½ percent more than the risk-free rate (defined as the interest rate on Treasury bills) over rolling 20-year periods, the Board currently plans—when the Fund is fully invested later in 2004—to allocate 22 percent of its assets domestically (including fixed interest investments, listed equities, and other growth assets such as private equity, property, commodities, and infrastructure) and the rest abroad (with almost 60 percent in international equities).18 Based on expected returns from this investment strategy and expected government contributions, the New Zealand Treasury projects that the assets in the NZSF will peak at around 40 percent of GDP in the mid-2030s before falling gradually thereafter but remaining above 20 percent of GDP through 2100 (Figure 2).

Figure 2.
Figure 2.

New Zealand Supernnuation Fund

(percent of GDP)

Citation: IMF Staff Country Reports 2004, 127; 10.5089/9781451830255.002.A002

Source New Zealand Treasury

#2154984 v1 - New Zealand: Selected Issues: 2004: Full Text (Compounded) May 5, 2004 (10:58 AM)

3. The shift to pre-funding pension liabilities and the large projected size of the Fund have raised concerns about the economic implications and risks of the NZSF. This chapter reviews the international experience with pre-funding public defined-benefit pension schemes, with a focus on recent reforms in industrial countries—Canada, Ireland, Norway, and Sweden. It also examines the potential implications and risks to New Zealand from the Fund including specific concerns, inter alia, on the impact on national saving and on foreign exchange and domestic capital market markets, the implications for government and individual behavior, and the vulnerability to political pressures.19

E. International Experience in Industrial Countries

4. To address the expected burden on public pensions of population aging, many countries have implemented reforms to increase the size of pension fund reserves relative to the expected liability. These reforms include reducing long-term pension liabilities—by lowering or means-testing benefits and/or raising the retirement age—and increasing pension reserves—by raising taxes and/or earmarking funds. Some countries have also taken steps to increase investment returns of earmarked funds by investing in private assets. This section briefly reviews the experience of countries that have chosen government-managed investment of pension liabilities, particularly those countries that made reforms in recent years to allow investments in private assets.20 These countries include Canada, Ireland, and Sweden (Table 1).21 In addition, in Norway, central government budget surpluses (including net oil revenues) are invested in the State Petroleum Fund (SPF). Although the SPF is not technically a pension fund, an objective in creating the SPF was to help cover increased pension and health care costs due to population aging.

Table 1.

Selected Government-Managed Public Pension Funds

article image

For Sweden, year new fund commenced investment operations.

End-2003, except Ireland July 2003 and Sweden end-2001. For Canada, total assets of the Canada Pension Plan.

Sources: New Zealand Superannuation Fund; Canada Pension Plan Investment Board; Ireland National Pensions Reserve Fund Commission; Norges Bank; Palacios (2002); and staff estimates.

5. There are a number of concerns related to government management of pension funds. Aside from typical problems with (funded or unfunded) public pension schemes (such as disincentives to work and save), these concerns include vulnerability to political interference, which may lower the investment returns of the funds, and capital market and other economic disruptions and risks related to the potentially large size of the funds. Political interference mainly stems from pressures to make socially or politically attractive investments, such as to subsidize state governments and public enterprises, housing, and construction projects. Pressures could also arise to prop up ailing stock or capital markets. The large size of the funds could lead to the government becoming a price maker in capital markets (including in government securities markets), with government decisions on asset allocation leading to significant market fluctuations and added market uncertainty. Moreover, while expected returns would be higher if funds were invested in private assets than solely in government securities, risks on investment returns would also increase leading to potential negative implications for the government’s balance sheet.

6. To address these concerns, recent reforms in industrial countries have improved the governance, transparency, and accountability of public pension reserve funds. Fund managers have been given greater independence in setting investment policies, and reporting and auditing requirements have been increased. In some of the countries, strict investment allocation restrictions (such as passive versus active management of assets and limits on acquiring domestic government bonds or other domestic assets) have been added to address issues related to the size and level of development of capital and foreign exchange markets, as well as concerns about political interference and government incentives. The long-term nature of the pension reserve funds, often with withdrawals restricted for many years, also reduces shorter-term risks related to holding private assets.

7. In Canada, a professional body, the Canada Pension Plan Investment Board (CPPIB) was set up at arm’s length from the government to manage new investments in the Canada Pension Plan (CPP).22 Statutory provisions generally require the CPPIB to follow the existing regulatory framework for private pension plans, including concentration limits on exposure in real estate or to any single entity. Based on this framework, the share of foreign investments was also initially restricted to 20 percent of total assets (subsequently raised to 30 percent of total assets by 2001 in two steps). In addition, the CPPIB was originally required to follow a passive investment strategy for domestic equity investments (replicating one or more widely recognized broad market indices), but subsequently active management has been allowed. The act establishing the CPPIB also mandated explicit objectives for the Board—primarily to maximize investment returns without incurring undue risk to the CPP. Currently the CPPIB, using external managers, only manages assets in its diversified market-based portfolio that have been accumulated since its inception in 1999, but after 2005, the Board will also manage legacy holdings of the CPP, mainly provincial government bonds. Withdrawals from CPP reserves are expected to begin in 2020.

8. In Ireland, an independent professional commission governs the National Pensions Reserve Fund (NPRF), which was launched in 2001.23 The Commission has an explicit commercial investment mandate to maximize total financial returns subject to a prudent level of risk. In addition, investments in domestic bonds (including government bonds) are forbidden. Withdrawals from the NPRF are programmed to commence in 2025. The Commission determines the investment strategy, including the asset allocation, with the National Treasury Management Agency (NTMA) as the investment manager for the first ten years of the NPRF. The NTMA contracts out most of the funds to private asset managers and directly manages only the passive euro zone (non-Irish) government bond portfolio (18 percent of total assets at end-2002), strategic and residual cash (26 percent), and the currency (hedging) overlay program (NPRF Commission, 2003). The NTMA also monitors the performance of the NPRF, including risks to the Fund.

9. The Norges Bank, the central bank, manages Norway’s SPF on delegation from the Ministry of Finance. The SPF is formally a local-currency account with the Norges Bank, which then manages a foreign-currency denominated portfolio in its own name against this portfolio (Norges Bank, 2004). According to the regulations, the Ministry of Finance, after consultation with the Norges Bank, establishes a benchmark portfolio with limits on credit and interest rate risk and stipulated ranges for the asset mix (fixed income versus equity investments) and currency and market distribution. The central bank is then required to achieve the highest possible returns, given the restrictions implied by these regulations. The Norges Bank uses both external and internal management of the fund and a mix between active and passive management. The SPF cannot raise loans, so contributions to the Fund can only come through government budget surpluses and withdrawals occur with budget deficits. The primary objective of the SPF is redeploy petroleum wealth to avoid excessive current spending and promote a gradual transform of this wealth into foreign financial assets. Investing in foreign assets also prevents excessive exchange rate appreciation, reduces political pressures related to investing in domestic assets, and builds reserves to help cover increased fiscal costs due to population aging.

10. In Sweden, pension reserves in five pre-existing funds were transferred to four new units with improved governance and less onerous constraints on investment decisions.24 The new funds, which began investment operations in 2001, were given the objective of maximizing returns subjected to stated risks tolerances. The legislation related to these funds forbids social, economic, and industrial policy goals in managing the funds, although it notes that investment policies need to state how environmental and ethical considerations are taken into account while still achieving high investment returns. The two main investment restrictions are a 40 percent limit on unhedged foreign currency exposure and a requirement to allocate at least 30 percent of assets in fixed income instruments with high credit ratings. The funds are also subject to exposure limits on individual firms and can invest no more than five percent of assets in unlisted securities.

11. In all four countries, the pension reserve funds have at least annual audit and public reporting requirements. Performance compared to objectives and financial and management controls are also reviewed on an annual or longer-term basis. In Canada and Norway, quarterly financial statements are provided to the public, while in Sweden, audited semi-annual reports are published for each fund. In Canada, public meetings on the CPP must be held once every two years in each participating province (all but Quebec).

F. Economic Implications of the NZSF

12. Governance, accountability, and transparency arrangements of the NZSF are similar to best practices in these other government pension reserve funds and private pension funds. The NZSF is managed by an independent board with a duty to invest the Fund on a prudent commercial basis. Performance statements and reports are published on a regular basis.25 The Fund’s performance is also reviewed on an annual basis in the NZSF Annual Report against a Statement of Intent, which sets out the NZSF’s objectives and financial forecasts at the beginning of each year. In addition, the performance of the NZSF and the Board of Guardians will be assessed independently at least once every five years by a person appointed by the Minister of Finance, with the report provided to Parliament and the public.

13. Concerns that NZSF investments could disrupt the functioning of capital markets are mitigated by the Fund’s investment strategy, which allocates only 22 percent of assets domestically. The decision to invest only 7½ percent of funds in New Zealand equities is expected to limit exposure of the NZSF (even at its peak) to under 10 percent of the value of any individual stock.26 In 2001, average daily trading volume of the New Zealand dollar in Australia and New Zealand alone—additional trading occurs in London and New York—was approximately $NZ 2.8 billion in the spot market and $NZ 13 billion in the swap market. As these trading volumes dwarf the amount of funds being invested internationally by the NZSF (roughly $NZ 1.8 billion annually on average during 2003-2020 or 78 percent of the total investment), the foreign exchange market is unlikely to be significantly affected. Risks to the entire Fund from potentially more volatile private investment returns are also decreased by the long-term (20-year or greater) horizons of the NZSF’s investments. The Board of Guardians’ interim policy is to hedge 60 percent of the Fund’s foreign currency exposure in international growth assets and 100 percent of the exposure in the international fixed interest portfolio. If this policy remains unchanged, the NZSF may have difficulty finding counterparties as its stock of international investments grows. The current investment strategy allots 10 percent of assets to domestic fixed interest investments, but does not preclude investments in domestic government securities (as found in Ireland and Norway). If government net debt continues to decline, a prohibition on these investments may be warranted, including to reduce government incentives to tap these funds.

14. National saving could increase somewhat if pre-funding pension liabilities in the NZSF leads to increased government saving. Empirical studies have shown that roughly 50 percent of increased public saving tends to be offset by a reduction in private saving.27 An assumption that contributions from the government to the NZSF meant higher public saving would imply an increase in public saving of 1.2 percent of GDP annually (the average annual contribution to the NZSF through 2020, as noted above). With a 50 percent offset in private saving, overall national saving would increase by 0.6 percent of GDP, with a similar increase in the current account balance if domestic investment and the value of the exchange rate do not change.28 However, it is unclear if earmarked contributions to the NZSF would affect overall government saving as instead of making these contributions, the government could allocate surpluses to retire government debt. If overall government saving were not changed by the NZSF, the impact on private saving theoretically would depend on the extent to which individuals believe that pensions have become more certain by the creation of the NZSF.


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  • Feldstein, Martin, 1996, “Social Security and Saving: New Time Series Evidence,National Tax Journal, vol. 49 (2), p. 151164.

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Prepared by Ranil Salgado (Ext 3-4182).


NZS is a universal pension benefit that is provided by the government to all eligible citizens or permanent residents over the age of 65. The eligibility requirement, with some exceptions, is that the beneficiary has spent 10 years in New Zealand after the age of 20 and five years after the age of 50. The benefit is not subject to means tests or income history requirements. For a married couple (both eligible), the minimum pension level (for both) is 65 percent of the national average ordinary time weekly earnings. For estimates of net pension cost, for example, see McCulloch and Frances (2003). Net cost, which is defined as the after-tax cost, is considered the relevant cost to the government, as NZS payments are taxed as income to the recipients. These estimates are broadly consistent with those found in Sarel (1998), Polackova (1997), and other studies.


As of end-February 2004, the value of the NZSF was $NZ 3.2 billion, with roughly 41 percent in international equities, 9¾ percent in international fixed income, 8¼ percent in New Zealand private fixed income, 6¾ percent in New Zealand equities, and 34 percent in domestic Treasury bills and cash (NZSF, 2004).


See New Zealand Treasury (2000) for a broader discussion of potential implications and risks.


An alternative, which has been implemented in countries such as Australia and Switzerland, would be a publicly-mandated retirement scheme in which assets are managed in private individual accounts. Such a scheme (combined with a public top-up provision to guarantee a minimum pension) was almost universally rejected by voters in New Zealand in a 1997 national referendum. See Sarel (1998) for more information on the proposed scheme.


See Casey et al. (2003) for a summary of other recent pension reforms in OECD countries.


More details are available at


More details are available at


See Palacios (2002) for more information, including other reforms to Sweden’s pension scheme.


The NZSF publishes a monthly performance report on its website (


Based on estimates by the NZSF staff. Currently, the stock market capitalization in New Zealand is about 44 percent of GDP. At its peak in the mid-2030s, the size of the funds invested in domestic equities is projected to be about 3 percent of GDP.


For example, see Masson et al. (1995). The offset is generally known as Ricardian equivalence—namely, as government balances improve individuals believe that taxes in the future will be lower than otherwise, so expected permanent disposable income rises and consumption increases. Feldstein (1996) similarly finds that the U.S. Social Security System reduces private saving by about 50 percent.


It is unclear how domestic investment would be affected by the NZSF, given that New Zealand has a very open capital account. Theoretically, domestic investment could increase if the marginal product of capital rises (due to an increase in productivity) or if interest rates fall. The latter could occur if increased national saving due to the NZSF allows for a decline in the risk premium for New Zealand.

New Zealand: Selected Issues
Author: International Monetary Fund