Curbs on superannuation fund board possible

By BRIAN FALLOW

Some constraints may be put on the board entrusted with investing the Government's proposed superannuation fund.

A board, to be called the Guardians of New Zealand Superannuation, will be set up to invest the fund's assets, expected to peak at around 50 per cent of gross domestic product in the late 2020s.

It will decide the investment strategy - what asset classes to invest in and in what proportions - and contract out the implementation of that strategy to a number of commercial fund managers.

"The fundamental principle is that it must be on a prudent commercial basis and aim to achieve strong long-term returns," Finance Minister Michael Cullen said yesterday.

"It will not be used to meet other Government objectives."

However, the absolute purity of the Guardians' independence may be lost in the process of building political support for the scheme.

Dr Cullen said he wanted to explore further with the Greens the question of putting some ethical limits on potential investments, without constraining the commercial objectives of the fund.

AXA New Zealand investment manager Barry Lindsay said he did not think restrictions against investing in, say, liquor, tobacco, gambling or armaments concerns would be a major obstacle to a fund manager or necessarily reduce expected returns.

AXA chief executive Ross McEwan said a typical fund at the moment might have 35 to 40 per cent of its assets in international equities, 20 per cent in New Zealand equities, and the rest spread among bonds, cash, mortgage-related securities and commercial property.

Mr McEwan welcomed having a board which would be at arm's length from the Government - though subject to the normal oversight of a crown entity - and whose members would have commercial experience, and having commercial fund managers competing for the business.

Among the strategic decisions the board will take will be the mix between active and passive investment and the extent of pooled versus direct investment.

A limitation, especially at first, will be the capacity of the board's staff to monitor fund managers.

"Passive investment may initially be most appropriate for the proposed fund," a Government paper says.

Before appointing the board, the Government will call for nominations from organisations representing the elderly, employees, employers and the savings industry. But those nominated would have to have appropriate commercial experience for managing an investment fund, Dr Cullen said.

Officials had persuaded him that the fund's investment returns should be subject to tax, he said.

The Treasury argued that a tax-free fund would give the fund managers a strong incentive to engage in tax-avoidance behaviour with other, taxed, entities.

It would bias the fund towards owning businesses outright rather than being a portfolio investor and would at the margin favour fixed-interest securities over equities.