English looks to cut $27bn Govt fund risk: buying more bonds?

Finance Minister Bill English has written to the big Govt-owned funds inquiring about their risk profiles.

Finance Minister Bill English has written to the chief executives of the three big government-owned fund managers to ask them if they are taking on too much risk, which has raised concerns within the funds that the government wants them to buy fewer shares and more government bonds.

Fears that the government funds would be directed to invest their NZ$27 billion into government bonds have surfaced in recent weeks as the government examines whether to direct the NZ Superannuation fund investments into certain areas closer to home.

The pressure of heavy government bond issuance in coming years and a potential credit rating downgrade are also thought to weigh on the government, particularly in the wake of heavy losses on global stock markets.

This was reinforced today by the NZ Debt Management Office's announcement that the government will have to borrow NZ$1 billion more than expected in the next 8 weeks and by news of a poorly supported government bond tender on Friday.

English's office confirmed to interest.co.nz it had written to the CEOs of the ACC, the New Zealand Superannuation Fund and the Government Superannuation Fund and had asked them for assessments of the levels of risk they were taking on.

"The government is keen to get a better understanding of its balance sheet and this is part of this process," a spokesman for English told Interest.co.nz.

"We're taking a more active look at the Crown's balance sheet as part of the overall public sector. It's not about directing the funds into certain asset classes," the spokesman said.

However, sources within the funds told interest.co.nz there were concerns that the government wanted them to de-risk their portfolios, possibly by buying more government bonds.

"The request was for the boards (of the funds) to say what would be the minimum risk portfolio that would match their liabilities for that particular organisation," one source said.

Another source said the letter had sparked a heated debate at the board level of one of these funds about whether the government wanted them to 'de-risk' by buying government bonds.

English's office denied there was a specific mandate to 'de-risk' the portfolios of the government funds. It said the project was part of the overall plan to improve the Crown's balance sheet management. The project is being run out of Treasury by director Brian McCulloch, who Treasury describes as someone who led the policy development for the NZ Superannuation fund.

The three funds manage a combined NZ$27.4 billion in assets, including NZ$4 billion in the Government Superannuation Fund (which provides pensions for public servants), NZ$11.5 billion in the New Zealand Superannuation Fund (sometimes known as the Cullen Fund) and NZ$11.9 billion in the Accident Compensation Corporation.

All have been hit hard by the downturn on global stock markets, raising the question about whether they should have been invested in less risky assets. The government's accounts to the end of February show the value of its shares in the various funds was NZ$10.45 billion, which was 27 per cent or NZ$3.9 billion below its forecasts.

The ACC fund's losses were a major factor in the decision to increase charges for the accident insurance scheme.

The Government Supperannuation Fund, which was closed to new members in 1992, but is still providing for 48,000 pensioners and 24,000 contributors, shifted in 2001 to investing in a variety of assets rather than just government bonds. Many argued at the time it should have stayed in government bonds.

Prime Minister John Key also signalled before the election he wanted the NZ Superannuation fund to invest more in New Zealand assets and the government is debating whether to contribute in coming years to the fund, given this money would have to be borrowed.

English's office said the framework for the government funds had only been partially created over the years. They were now operating independently, but did not have the necessary guidance on what levels of risk they should take. It referred to a Treasury Working Paper by Arthur Grimes in 2001 on Crown Asset Management: Objectives and Practice. Grimes was then the Director of Victoria University's Institute of Policy Studies and is now the Chairman of the Reserve Bank and a senior fellow at Motu Economic and Public Policy Research.

The project to assess the various portfolios was part of this process of assessing those risks before laying out a framework that took into account the Government's overall balance sheet risks, English's office said.

The Grimes paper recommended:

"Charge(ing) individual entities with setting mandates for asset management which reflect the nature of their liabilities, with the entity having an obligation - in the absence of any over-riding centralised decision from (Asset Liability Management Office) ALMO - to match assets and liabilities to minimise risks to their net worth.

"Establish an ALMO to manage Crown-wide risk, taking into account the portfolios adopted by individual entities. The ALMO should structure Crown financial liabilities to shift the global Crown portfolio towards the desired point on the risk-return frontier.

"It is an open question as to whether an ALMO should also have the ability to direct at least one Crown financial entity as to its asset portfolio - after receiving information on optimal asset allocation from that and other entities."

English's office said there was no pre-determined view that the funds should invest in government bonds. It pointed out that the bond market was currently not big enough to handle such a shift and did not have long enough bonds to match the funds' liabilities.

The NZDMO announced the creation of a bond maturing in 2021 earlier today.

INTEREST.CO.NZ