Super Fund Guardians clearing the way ahead

By BRIAN FALLOW

It will be September next year at least before the New Zealand Superannuation Fund starts to invest in financial markets, says David May, chairman of the fund's Guardians.

So far $1.1 billion has been set aside for the fund, which is designed to smooth the fiscal cost of the state pension over coming decades. It will be just over $2 billion by next September.

In the meantime, the money is sitting in an account with the Treasury's Debt Management Office, notionally accruing interest at the official cash rate of 5.75 per cent and attracting no tax - a return most fund managers would struggle to match in current market conditions.

When invested the fund will be subject to income tax.

The New Zealand Superannuation Act makes the Guardians responsible for investing the fund, which is expected to reach $60 billion in today's dollars by 2030, thereby keeping the Government at arm's length from the commercial influence such a major investor (by New Zealand standards) would wield.

The Guardians, appointed in August, have to draw up investment policies covering such things as an asset allocation strategy and by what benchmarks and timeframes to judge investment performance.

The Guardians have to figure out policy on how to use their voting rights in companies; they cannot take a controlling stake.

They have a statutory obligation to avoid prejudice to New Zealand's reputation as a responsible member of the world community, but have still to work out what ethical investment means in practice.

May said they expected to have drawn up the statement of investment policies by the June quarter next year.

The Guardians are researching how similar funds are organised in Ireland, Canada, Alaska, Norway, Sweden, Chile and Singapore.

Once the asset allocation strategy is decided, the search for fund managers to implement it can begin. Investment managers will be appointed in the September quarter next year.

The search for a chief executive and for legal, tax and investment policy advisers is already underway.

To keep that process above reproach there will be a "probity audit" for key appointment processes. The Auditor-General will have that task - answering the ancient question, "Who guards the Guardians?"

As withdrawals from the fund will not begin for at least 20 years, the time horizon on which risk/reward trade-offs are assessed is likely to be longer than for private-sector funds.

"Short-term fluctuations need to be kept in perspective," said May. "The Guardians' performance needs to be measured over the long term."