In part four of a series of articles on wealth, Bruce Sheppard probes further into passing and managing wealth between different generations of families

By Bruce Sheppard*

You wanted to run a pension fund… didn’t you?

So your family has made it – you’ve achieved enough money and assets not to worry anymore. Generation One (G1) is now considering ‘what next’, or maybe G2 is now in control. There’s a pile of stuff to be sorted through and thought about. This family wealth now needs governance to ensure expectations are met and perhaps consider doing something useful – something that the family can feel good about and can remain together to do so.

It may even emerge that the family has competing dreams, but how do these get reconciled and managed and more importantly satisfied?

How do you balance meeting the expectations of those that either have them or worse, those that have been created by time and inopportune conversations? Add to this the desire to remain relevant, connected, useful and purposeful in pursing whatever the next dream you have for yourself, your family, your country or the world and humanity?

Honestly, it’s easier not to feel these responsibilities that come with the privilege of wealth, compared to just spending it on one’s own pleasure.

My wife says, and it is a useful quote, “All assets are liabilities.” What I think she means, is that assets demand your time. You have to think about them, worry about them and tend to their needs. In actuality you don’t, you can do nothing and forget about it all, so long as you can comprehend and accept the consequences of just doing nothing.

Never forget that the choice of not making a choice, is in itself a choice,
even if you don’t see it that way at the time.

So first up, do you want this responsibility for others’ wellbeing and satisfaction? If not, conspicuous consumption or just doing nothing could look attractive. If so, what are the expectations of your family and the attendant charities?

If expectations are yet to be created or defined, then consider what can be created, what benefits to provide and then how they will be met. This is no different to running a pension or endowment fund. If this is your gig, then great, but if not – how will you do this?

In all pension fund assessments, there are a bunch of benefits to be paid – people will live until they die, and in due course there will be another generation and a new bunch of entitlements and so on. The more expectation you create, the more expectant squawking chicks you have, the longer they live and the faster they breed, the more the pension fund will need to have available to feed them. Consequently like most large pension/endowment funds, the more underfunded the fund will be. Effectively this means you run the risk of running out of cash before all squawking chicks have died. Pension funds going broke is a pretty ugly situation for the people running them. NEVER run out of CASH!

The factors in working out how much is enough to satisfy the squawking chicks are as follows;

• Manage the expectations and define the benefits.
• Based on life expectancy (and if applicable birth rates through time) and the likely number of chicks alive and squawking at the same time – determine the maximum amount of further benefits that will have to be paid (an actuarial assessment overlaid with a demographic study).
• Then work out how much capital you need to set aside to fund those entitlements until they expire. Clearly the amount you have to set aside is reduced depending on the return derived by you on these assets.

With conservative funds now getting close to zero in net return and negative returns when adjusted for inflation, the amount you need to set aside to run a pension fund is potentially greater than the face value of the benefits offered.

How do you reduce the benefits (always painful), or increase the return on the pension fund assets (like moving to growth or aggressive asset portfolio designs)?

If the latter, then the pension fund requirement to hold cash increases, as aggressive and growth funds can track in loss for a considerable period of time. Being forced to liquidate assets at an inopportune time means that the pension fund assets take more risk and potentially derive a lower return than a conservative fund.

The good news is that running pension funds by comparison with selecting and managing wholly owned business or a portfolio of such is a hell of a lot easier but a hell of a lot more boring. In the words of my now deceased uncle, “This is like watching paint dry.”

There are very few large family offices (click here for information on what family offices are) in New Zealand. Even fewer that feed across ever increasing generations. One such family office is the Todd family. Recently they sold their property assets to focus on oil and gas, a brave play, but also perhaps to rebuild cash due to the compounding nature of expectations and defined benefits. That however is their business. What this underlines (if perpetual benefits are contemplated), is that the expectation and entitlements will eventually outstrip the capacity of the capital to pay them.

Unless you use charitable trusts or companies, which have perpetual succession, your assets will devolve to your family within no more than 125 years. The new Trusts Act 2019, has extended the perpetuities period from 80 years to 125 years. Thus at some point your squawking chicks will get their share and have to start feeding their own squawking chicks.

If you use a corporate structure to hold together the critical mass of capital your family has created, then what the chicks get are shares in a company that is now running a pension fund and an investment office. The defined benefits become a simple dividend per share. The chicks can sell their shares, and if you choose to, you can regulate whom they may be sold to – other family members, for example.

This is a great way to create family feuds! But in most circumstances, is better than the alternative if you are seeking to create a shared enterprise with a shared purpose whilst holding together the critical mass of resources required to be effective.

There are precious few widely held family companies that have stayed together as a family enterprise over a long period of time. Even less that have done so with no public animosity with each other.

There is only one example that I can think of that has achieved longevity as a family enterprise. I’m not saying that there are no family tensions in this extended family, or even that the business they operate is exceptional… but it is a business that has existed in its current form for nearly 100 years. It’s still owned by the lineal descendants of the original founders going back to the 1880’s, and as such, are a part of the Auckland landscape and with a living legacy for their families and community.

They are not clients of our firm, I can’t even say I know them intimately, but they are a family I am proud to have shared a building with for 35 years – Smith and Caughey Limited and the Caughey family. The company has 64 shareholders, including some past executives that have become part of their ‘whanau’. Eighteen of these shareholders are trusts or estates with another generation coming through, and there is one well-known Auckland charity – the Caughey Preston Trust Board. The directors include six named Caugheys’, one other relative and one ex CEO of who I was honoured to be invited to his farewell a couple of years ago. The CEO is a Caughey, as is the Chair. The Chair has a life outside the business and so do many of the other shareholders.

They appear to be a family that has worked out how to stay together, worked out what they are about, and  executed on that with humility, determination and with a set of values around how you do business that make them quite exceptional. The CFO (not a Caughey) recently said the AGMs are a delight, a sort of family reunion and annual catch up.

How does this relate to this dissertation on working out what your pension fund might look like? It’s only to give you context. In 100 years, if you want to keep your wealth in some critical mass, ultimately your family office will be a corporate structure and through time the share register of your family office will widen out.

In the final of this series, before I wrap up in the New Year with a summary of thoughts and outline an extended network to support those that wish to think differently about wealth and its purpose, I will talk about why finding purpose is important, how this gets done and when and how it gets documented and governed.

*Bruce Sheppard is founder and managing partner of accounting firm Gilligan Sheppard. He's also the former chairman of the New Zealand Shareholders' Association. This article first appeared here and is used with permission.