Michael Reddell: Pretty (il)legal

The title of this post was, of course, a reference to the efforts of former Minister of Finance and National campaign manager Steven Joyce to defend the use by National of music inspired by or copied from some overseas band’s work. It was, he claimed, “pretty legal”. The courts disagreed.

Joyce himself developed form in this area, and as Minister of Finance in 2017 appointed an acting Governor of the Reserve Bank for six months, with no legal authority whatever. It was, in many respects, a pragmatic solution (a new permanent Governor could not, under our conventions, be appointed to take office very close to election day), but instead of passing a brief technical amendment to the Reserve Bank Act, to deal with what was perhaps an unforeseen oversight in the initial drafting, he simply went ahead and made the questionably legal appointment. At the time, this blog devoted a lot of time and space to the issue (having flagged the looming issue a couple of years in advance, while officials and ministers did nothing). Eventually, through the good offices of the Ombudsman, Crown Law – CEO, one Una Jagose, who has since developed something of a reputation – released a summary of their legal advice to Treasury on the issue (discussed, with other relevant links, here). Crown Law’s case seemed to boil down to no more than “well, Parliament must have intended to enable the appointment an acting Governor of this specific sort”. Had they intended it, it would have been a simple matter for a suitable clause to have been in the act. None was. (That particular gap has been fixed in the amendments to the Reserve Bank Act in recent years).

It mattered for a number of reasons.

First, because we are supposed to be governed under the rule of law, not ministerial whim, or the fancy of officials who happen to think a particular outcome would be convenient, but can’t be bothered asking Parliament to legislate. “Pretty legal” is no sort of acceptable standard, the more so when on a plain reading (detail and legislative context), something is actually pretty clearly illegal.

There are also real risks when officials and ministers play fast and loose with the law, for their own convenience, betting perhaps that no one will be bothered with the expense and delays in access to civil justice to attempt to challenge it formally. Fortunately, Grant Spencer – who compromised a worthy career by accepting this temporary but dubiously legal appointment – doesn’t seem to have been faced with particularly contentious choices in his few months occupying the office, but the lawyers might have been gathering if there had been a very costly or contentious decision going against one or other groups of interests. In those days, all power at the Reserve Bank rested with the Governor personally.

And, frankly, this was our central bank, supposed guardian of financial stability, and prudential regulator, including around ensuring that good standards of governance exist and are upheld in banks and financial institutions. Would this sort of – pretty legal/ evidently illegal but convenient – standard have been even close to acceptable to the Reserve Bank if a supervised institution had offered it up in the context of its own appointments? And while the appointment was made by Steven Joyce, there is not the slightest sign in the documents of any unease from the Bank. Its Board was, then as now, chaired by Neil Quigley. (You may recall that Quigley – in his day job – and Steven Joyce have an economic relationship recently called out and criticised by the Auditor-General no less. They probably thought that arrangement was pretty much okay. It wasn’t.)

All that said, and bad as that episode was, it was all over in six months. A permanent Governor, lawfully appointed, took office and things moved on. Not all such “pretty (il)legal” stuff done by governments is so time-limited.

All that in the post so far was really by way of scene-setting for another example of “pretty legal” sort of thinking. It doesn’t affect many people, but does involve the Reserve Bank (Quigley again, Orr, and their very senior appointees), The Treasury, the Minister of Finance and most of her ministerial colleagues on the one hand, and a fairly small group of mostly very elderly pensioners on the other. Officials and ministers are acting as if the law simply doesn’t matter, to achieve what might otherwise in many ways be a sensible outcome, and by refusing to make simple legislative amendments are doing so in a way that leaves those pensioners and their spouses highly exposed to what could, in the wrong circumstances decades hence, be catastrophic financial risk.

I will try to keep the explanation short and clear.

The Reserve Bank established a pension fund for employees back in 1935. The defined benefit (pension) bit of the scheme was closed to new members in 1991 (and the later defined contribution bit has also been closed for a long time) and all the members of that scheme are now retired. There aren’t many left (50 or so), and as schemes shrink cost burdens tend to increase, investment options diminish, and it gets harder to find member trustees.

The scheme’s rules allow for it to be wound up. But in that event, trustees have to be able to purchase replacement pensions. There are no private annuity providers now in the New Zealand market, but decades ago a provision was included allowing for the possibility of transferring pension liabilities to the Government Superannuation Fund (not coincidentally, the provisions of the two schemes are pretty similar).

I’m a trustee of the scheme – never quite imagining in 2008 when I filled in as someone’s alternate that I’d still be there 16 years later. A couple of years ago I championed exploring whether a transfer to the GSF was really a feasible option. If it could be done in ways that replicated members’ benefits, it would lead to measurable cost savings for the Bank, and get all the compliance etc rigmarole out of our lives. I suspect that no one who has served as a trustee of this scheme in the last decade has counted it a pleasant or satisfying experience.

Anyway, my colleagues agreed and we got the Reserve Bank Board (which has the final decision on a wind-up) to agree to us exploring the issue.

There were a couple of immediate questions. If the GSF Authority wasn’t interested, we couldn’t compel them. But even if they were interested did they have the legal powers, under their own legislation, to assume our liabilities (in exchange for payment)?

People, with various degrees of creativity, looked through the GSF Act and found two possible straws to cling to. One dropped away very quickly, as everyone accepted it didn’t help.

But then there was section 98 of the Government Superannuation Fund Act.
Click to view

When it was first suggested as an avenue, I scoffed. And the more I reflected on those provisions, and their legislative context/history, the more implausible it became.

The legislation dates back many decades and what evidence there is suggests it was written mainly with university lecturers in mind – many of whom in those days came from the UK. It made sense to enable agreements that recognised service in (say) UK universities for NZ university pension purposes and vice versa. What was envisaged was a reciprocal relationship.

You’ll note that the provision isn’t restricted to overseas entities. Reciprocal arrangements can be enabled, by Order in Council, with other New Zealand entities. It would, for example, have been fully in order decades ago for (an Order in Council enabling) the Reserve Bank and the GSF to have entered a reciprocal agreement to mutually recognise service in the other (eg for Treasury staff moving to the Reserve Bank, Reserve Bank staff moving to Treasury). There was never an agreement of that sort (in fact such were the restrictive practices at the Reserve Bank even when I joined in the 1980s that it was all but impossible to join the Bank if you were aged over 26).

But the critical words in that statutory provision – which has apparently not been tested by the courts – is “reciprocity” (“providing reciprocity in matters relating to superannuation”).

A few months ago a Cabinet committee, attended by 19 ministers (including the PM) and an under-secretary, decided that it was fine and dandy. A bit later Treasury pro-actively released the relevant Cabinet minute. They also released, with significant redactions, the associated Cabinet paper, presumably prepared for the Minister of Finance by Treasury but with input from various other government agencies.

It is a shoddy paper from start to finish (starting with the repeated claim that the Reserve Bank scheme is a “government” scheme – it is a fully separate legal entity, on the same footing and regulatory basis as any other legacy superannuation scheme under the Financial Markets Conduct Act, with the Reserve Bank having no powers over it, and the government itself having no powers or liabilities different from those applying to any private scheme). It is perhaps no wonder that both the Minister and Treasury refused my OIA requests for advice received on this GSF option.

It is, however, usefully clear and explicit that the main reason for such a transfer, if it can be legally done, is to save money for the Reserve Bank. That is an entirely legitimate objective, provided members’ interests and rights are robustly protected. But there is no sign that the Minister provided any such assessment to her colleagues, who presumably nodded this through. A transfer to GSF could, in appropriate circumstances, be a mutually beneficial and tidy outcome. But it simply isn’t legal on the law as it stands, and precisely because it is proposed to be done using an Order in Council, which can simply be revoked by any future minister/government, or disallowed by Parliament itself under standard secondary legislation provisions, with no recourse for pensioners, it leaves those pensioners in an extremely vulnerable position. The risk of such revocation or disallowance might seem low today, but as even the Cabinet paper notes the liabilities probably have at least 40 years to run, and no sensible person concerned about their own finances is going to approach decades-long contracts saying “oh, never mind, explicit written statutory powers will probably never be used”. You look for protections, and what the Minister of Finance is proposing to do – pretty illegal in the first place – offers none at all.

“Reciprocity” simply does not mean what it has to mean for a simple sale and purchase agreement in which the trustees pay cash to GSF to take the liabilities off their hands to count. It doesn’t mean something like that in plain English usage, and it does not do so anywhere else in New Zealand statutes (and yes, I have worked my way through every single reference). When I buy my groceries from the supermarket it is a mutually beneficial exchange, but no one thinks of it as an agreement involving “reciprocity” (which in general and statutory usage, and things like Social Security Agreements involves something much more of a “like for like” nature.) Moreover, as even the Cabinet paper notes this (pretty illegal) wheeze involves trying to use an Order in Council to get round an explicit statutory prohibition of new entrants to the GSF scheme itself.

A couple of months ago, having become aware of the Cabinet minute (although not then of the redacted Cabinet paper itself) I wrote to the Minister of Finance outlining in some detail my concerns, and proposing instead a simple and uncontroversial legislative amendment to the GSF Act, which would provide trustees and members legal certainty, and markedly reduce future risks for members (since revocation of an authorising Order in Council or disallowance by Parliament would no longer be options). I have not had a reply from the Minister. When I approached her again, a private secretary suggested that I could expect a response shortly. Nothing has since been heard, suggesting that a conscious decision has been taken to simply ignore my concerns, as someone with legal duties to scheme members.

The full text of my letter to the Minister of Finance is here.

Letter to Minister of Finance re section 98 of the GSF Act

The Cabinet paper very briefly touches on the legislative option (having provided ministers with no information on the risks and legal doubts about the approach her officials would have them take).

Click to view

I guess if there is no formal legal challenge, pretty illegal stuff can be done quickly. But this is a bizarre argument more generally. Nothing in the Cabinet paper suggests any urgency about an arrangement. The scheme functions, bills are paid, pensions are paid, and although pressures will build they have not done so yet. It would be good to tidy things up, but only if it can be done robustly, and not with ministers brushed off with lines about there being nothing to worry about and only minor implications for members). As it happens, it is now late October 2024 and if a transfer happens it certainly won’t be until 2025. Doing things properly, by the book, not indulging in quick “pretty illegal” fixes, unbothered about the future vulnerabilities created, should be the way our ministers and responsible officials operate.

But I guess this is New Zealand.

You might be wondering about the other trustees of the scheme. Well, three of them are appointed by Orr/Quigley – two are among Orr’s many DCEs – and openly take the view that it is no concern of theirs whether the current law actually allows a transfer of this sort. Of course, in many commercial deals it isn’t possible for one party to look fully behind the scenes and be sure of the other party’s processes and internal authorisations. One often has to rely on warranties etc. But…..the GSF Act is a public statute, has been on the books for decades, and simply does not contemplate or allow for a deal of this sort. Judging by the time spent, some might conclude that trustees have seemed much more concerned about their own future indemnity arrangements than about robustly protecting the best interests of members.

There are simple and much more robust fixes. It is beyond comprehension why the Minister and officials are not willing to take such a route. It speaks of indifference to law, and indifference to people. But it looked quick, and perhaps “pretty legal”

Michael Reddell spent most of his career at the Reserve Bank of New Zealand, where he was heavily involved with monetary policy formulation, and in financial markets and financial regulatory policy, serving for a time as Head of Financial Markets. Michael blogs at Croaking Cassandra - where this article was sourced.