Hon. Michael Cullen
13 July 2000
Embargoed until: 10.20 am 13 July 2000
FINANCIAL PLANNERS & INSURANCE ADVISORS ASSOCIATION
DR MICHAEL CULLEN SPEECH TO FINANCIAL PLANNERS & INSURANCE ADVISORS ASSOCIATION
WELLINGTON CONVENTION CENTRE (MICHAEL FOWLER CENTRE)
Thank you for the opportunity to speak to you today. You’ve asked me to share some of the government’s thinking on the
role of the financial services industry in general and in particular our thinking on whether the industry should be
Your business - and my business - is about giving New Zealanders a secure foundation from which to face an uncertain
future, confidence about the stability of policy settings about the soundness of the businesses in which they’re
That need for confidence and stability has formed the basis of this government’s policy programme.
We start from a good base. Economic growth is forecast to average around 3 per cent over the next three years. The
expansion comes on the back of a robust world economy and a competitive exchange rate. Importantly, this growth is
broader based than in the previous business cycle, with stronger contributions from investment and exporting and less
dependence on debt-funded private consumption. This contributes to a decrease in the current account deficit to 4.7 per
cent of GDP by 2003/04
On the fiscal front, the Government is looking ahead to substantial and rising surpluses. The forecast for 1999/2000 is
$763 million, rising in the coming year to a little over $1 billion. Projections for the following two years show the
same pattern of continuing improvement with surpluses of $2 billion and $2.7 billion.
Those surpluses will help take pressure off monetary policy and put us on track towards prefunding New Zealand
Superannuation. They are made possible by a firm hand on spending and a determination to maintain a fiscal cap of
$5.9billion over four years.
The greatest challenge to prudent fiscal management facing any government is how to fund the retirement of the baby boom
generation. It is not rocket science to work out that as us baby boomers age there will be more of us and we will cost
more in state pensions.
The demographic structure of the population is changing. There are uncertainties about the future of work and the future
costs of supporting different age cohorts, but there are enough certainties to demand our early attention to this
The good news is there is a reasonably large window of opportunity - about ten or twelve years – available to us. By
building up financial assets now, we can ensure that our children are not overburdened with taxes to support us in our
Because in the absence of a workable long term solution the choices we leave our children and their children are stark –
higher taxes or cuts to the pension.
I do not want to leave either as my legacy.
New Zealanders have shown us they expect us to preserve our universal publicly funded scheme.
By bringing some of the costs forward, pre-funding can give New Zealanders confidence that NZ Superannuation will be
available in the future.
I can tell you that work on prefunding New Zealand Superannuation is well advanced and we will be making more detailed
announcements very soon. It’s an approach that allows us to keep faith with retired New Zealanders, while avoiding harsh
adjustments in taxes and spending programmes.
New Zealand Superannuation is a corner stone. It provides a basic retirement income. Most people would want a better
quality of life in retirement than just the basics. Hence they need private savings to supplement their NZ Super.
The issue you will be looking at is what the government intends to do to facilitate additional savings and how that
might affect your industry.
Certainly confidence and stability are key to encouraging private saving
It is my belief that people have been discouraged from preparing financially for their future by the constant changes we
have seen in retirement income policy.
Without some certainty about public provision people can not know how much they need to personally set aside. With
pre-funding in place we will finally be able to provide people with a stable environment in which they can prepare for
I see pre-funding as double headed opportunity to help improve our dismal national savings record and improve our
equally dismal current account deficit.
The government will do so through the establishment of the Fund but there will also be an opportunity for private
individuals to improve their savings.
Your role is to support people in their savings activities and in attaining the income they want in retirement beyond
New Zealand Superannuation.
Through our working together, Government on public saving and financial planners and investment advisors on private
saving, we will ensure that people can have the retirement they aspire to in the future.
Let me turn now to how we tax savings. This is an issue that I have spent many a long evening mulling over.
I am interested in providing an alternative to New Zealand’s superannuation taxation regime of taxed-taxed-exempt (TTE)
through a taxed-exempt-taxed (TET) scheme.
A TET regime is sometimes advocated as a way of encouraging long-term savings, because it results in effective tax rates
that decrease over time. Short term savings are more favourably taxed under TTE but as time passes the ability to defer
tax under the TET regime slowly overpowers this advantage.
The Treasury has estimated that median income New Zealanders would be better off under a TET regime as long as they had
savings that are untouched for approximately 6 years or longer.
There is a great deal of debate as to whether the provision of such an incentive would actually lead to an increase in
net national saving. It may be that people save more because the after tax reward to saving increases. But it may also
be that they save less as the greater after-tax reward available means that they do not have to save as much to achieve
the goal that they were aiming for. Saving towards a goal is the primary saving technique that financial advisers
recommend for their clients.
There is an enormous amount of academic literature available on testing which of these two effects is strongest but
these studies are hampered by a lack of suitable data. For every tome suggesting one view there is an equally weighty
volume offering another. As far as I can see there is no strong evidence to suggest that incentives increase or decrease
The Government’s view is that there is likely to be an increase in saving if an incentive was to be provided but we will
be considering carefully how to proceed.
We need to be careful because in the event that the incentive led to a shifting of saving rather than an increase the
Government would have forgone tax revenue without managing to increase aggregate savings. And as Minister of both
Finance and Revenue that would be a double whammy of an 'own goal'.
You’ve asked me to talk a little about regulation and the sector.
In general, what I would call smart or appropriate regulation clearly addresses the “problem” or the issue at stake –
for example, the informational disadvantage of consumers and/ or investors
The benefits of the regulation should outweigh its costs. These costs include compliance costs, enforcement costs,
fiscal costs to the regulator and behavioural changes.
It should be transparent, consistent, stable and predictable.
It should promote the long-term interests of consumers, encourage innovation and productivity, and promote the
efficiency and fairness of the market.
There are currently two Acts which focus on providing adequate disclosure to help potential investors make better
investment choices – The Securities Act and The Investment Advisor Disclosure Act.
The Investment Advisors Disclosure Act places requirements on advisors and brokers, which can include the disclosure of
qualifications. There are currently no specific licensing requirements for insurance advisors or financial planners. As
you’ll know, the industry itself provides a form of self-regulation in the form of industry organisations that place
restrictions on members.
Whether advisors like yourselves should be licensed has been raised as an issue with the enforcement agency, the
Securities Commission. This issue is not, however, on the immediate work programme of the Ministry of Economic
Development. The current work programme focuses on improving the general robustness of our securities laws to enhance
The government plans to implement a Take-overs Code, improve the enforceability of insider trading laws, review laws
relating to insolvency and increase the flexibility and workability of the Securities Act and Regulations.
These changes are consistent with the New Zealand approach to securities laws of improving disclosure of information.
In Australia, there is currently an elaborate system of licensing of financial intermediaries. As part of the corporate
law reform proposals, this system would be replaced with a single system of licensing for all financial intermediaries.
Whilst the Australian system provides for a level of regulatory intervention that may not fit to the New Zealand
situation, the proposals do provide some insight into how the problem might be defined, and possible policy solutions.
New Zealand will of course, develop our own solutions and I would welcome your input into the policy making process.