"This decision is bigger than party politics," he said.
Mr Key said that it should not be presumed that the flag would change, and retaining the current design was a possible outcome.
He would like to see the referenda process completed during the next Parliamentary term so that it did not intrude with the 2017 elections.
Under the next government, all party leaders would nominate a MP to be part of the cross-party group.
Mr Key has previously stated his preference for a silver fern as the national flag.
Read more:
• Read Mr Key's full speech below
• Flag debate: Herald columnists give their views
• Flag debate: Readers have their say
• Editorial: Key needs to be bolder on flag change
Mr Key said that the current flag had served New Zealand well for 100 years.
But it reflected a time before superpowers, air travel, world wars, and the rise of Asia.
The design was dominated by the Union Jack in a way that New Zealand was no longer dominated by the United Kingdom.
Mr Key said that there was no groundswell of support to cut ties with the monarchy, but New Zealand needed to mark its independence.
"It's my contention that when we engage internationally, in forums ranging from secondary school debating to the United Nations, or from age-grade representative sports teams to the Olympics, we should be represented by a flag that is distinctly New Zealand's."
The Prime Minister said that he did not underestimate the significance of the current flag to New Zealand soldiers and their families.
"But being respectful of our history does not lock us permanently in the past."
The Green Party confirmed that it would maintain the process outlined by Mr Key if it were elected to government.
Co-leader Russel Norman said that it was appropriate that the debate on a new flag was not the focus of this year's election.
"This process looks reasonable, and it's good that it will be treated dispassionately outside of the political realm of the election period."
Flag debate: Herald columnists give their views
Fran O'Sullivan
Our flag too boring - we need one that stirs the blood
Brian Rudman
Fold up the old one and send it back to the British Navy
Garth George
We missed our chance to change it and now must wait
Tracey Barnett
World given so few clues it's a wonder they ever find us
Noelle McCarthy
Canada sets fine example in style, simplicity, effect
Rebecca Barry
Downsize Jack for a bigger space to fly our identity
Jim Hopkins
Let it remain - it's our history, the good and the bad
Tapu Misa
To a young, proud Pacific nation, the old flag means Jack
Paul Thomas
It doesn't say much about this country as it is now
John Roughan
New design would have to win everyone over
Read Mr Key's full speech below:
Good morning.
It's good to be here in a place where ideas are encouraged and discussed, because that's what I want to do today.
Anzac Day is approaching and, as you know, next year we will commemorate the centenary of that fateful landing by the Anzacs on the Gallipoli Peninsula on April 25, 1915.
In the struggle, the sacrifice, and the wretchedness of Gallipoli, an Anzac reputation for courage, endurance and mateship was forged that has endured long after those who survived that campaign have passed on.
Each year, on Anzac Day in particular, we remember our fallen as we should and as I hope we always will.
But once the centenary has passed, I think it will be time for us to take some decisions about how we present ourselves to the world beyond 2015.
For more than a hundred years the New Zealand flag has served us well, and we in turn have served it well.
It has given us an identity.
We have given it our loyalty.
But the current flag represents the thinking by and about a young country moving from the 1800s to the 1900s. A time before commercial air travel. A time when we had less of a role in the Pacific, and a time before Asia registered in our consciousness. That was a time before the rise of superpowers and before we had forged a formidable reputation on the battlefields of Europe. It was prior to the first tour by the New Zealand Rugby Union to the UK, and when our forebears thought their colonial protector would always be there for their descendants.
When you think about it, those who had a hand in the flag's design did well to include symbols that have endured for more than a century.
But it's my belief, and I think one increasingly shared by many New Zealanders, that the design of the New Zealand flag symbolises a colonial and post-colonial era whose time has passed.
The flag remains dominated by the Union Jack in a way that we ourselves are no longer dominated by the United Kingdom.
We retain a strong and important constitutional link to the monarchy and I get no sense of any groundswell of support to let that go. Nor could we or would we dispose of the cultural legacy which gave us a proud democracy, a strong legal system and a rich artistic heritage.
Each of these we have evolved and interpreted in our own way as an independent nation.
I am proposing that we take one more step in the evolution of modern New Zealand by acknowledging our independence through a new flag.
Some people say that we should look at the flag only if we're also reviewing our wider constitutional arrangements.
I don't agree.
Our status as a constitutional monarchy continues to serve us well.
It's an arrangement that provides stability, continuity and keeps our head of State above party politics.
However, this country, the way we see ourselves in the world and the way others see us, has changed dramatically in the past century. Our flag does not reflect those changes.
I acknowledge that New Zealanders have a range of views on the idea of changing the flag. I also acknowledge that significant change can be difficult and unsettling for some people so this is not a debate to undertake lightly, or quickly.
But my personal view is that it's time our flag reflected that we are a sovereign and successful nation that rightfully takes its place among developed economies in the 21st Century.
We are in a tremendous position to enjoy the benefits and challenges that our inter-connected and globalised world offers.
We are a country of travellers. Overseas experience is a rite of passage for many young Kiwis.
We are an open economy. Initially we were forced into it when Britain joined the Common Market but now we embrace the challenge of selling our goods, our services and our ideas into some of the most competitive markets in the world.
We do business all over the globe and, every year, 100,000 of the world's young people come here to learn. In doing so they become part of the next generation of connections with the countries to which we are closely linked.
We are fiercely protective of our independent foreign policy, and rightly so. That does not mean we don't act in concert with other like-minded countries over many things. Of course we do. We are a constructive and engaged nation always willing to work either behind the scenes or at the top table in international negotiations.
We stand ready to respond, when asked, to international emergencies, to contribute to international peace-keeping when appropriate and, from time to time, to serve in a military capacity in potentially hostile situations.
So we are independent, but in no way isolationist.
It's my contention that when we engage internationally, in forums ranging from secondary school debating to the United Nations, or from age-grade representative sports teams to the Olympics, we should be represented by a flag that is distinctly New Zealand's.
A flag that is only New Zealand's.
A flag that is readily identified by New Zealanders, and with New Zealanders.
I believe the current flag is not that flag.
I believe that not only can we do better, but that this is the right time to get on with it.
At the same time, I acknowledge there may be many New Zealanders who want to retain the existing flag, and that will be one option.
I have given careful thought to this.
Back in 1965, Canada changed its flag from one that, like ours, also had the Union Jack in the corner, and replaced it with the striking symbol of modern Canada that all of us recognise and can identify today.
Fifty years on, I can't imagine many Canadians would, if asked, choose to go back to the old flag.
That old flag represented Canada as it was once, rather than as it is now. Similarly, I think our flag represents us as we were once, rather than as we are now.
By law, the flag can be changed by a simple majority of Parliament but, as I've previously said, I do not believe that such a decision is one that MPs should take for themselves.
A flag that unites all New Zealanders should be selected by all New Zealanders.
This decision is bigger than party politics.
I would like us all to talk about it, but I do not think that it should dominate or distract from the other debates that occur in an election year.
The Government certainly has a lot to talk about in 2014. When the country goes to the polls, National will be asking New Zealanders for their continued support for our programme - a programme that has put New Zealand back on the right track.
The progress we have achieved has not come about by accident, and continuing that progress will not be achieved by chance.
We came into office with the country in recession, finance companies toppling and a Global Financial Crisis paralysing financial markets.
But our careful stewardship of the Government's own finances, our Business Growth Agenda, and the determination of our strong team of ministers to get better value for New Zealanders and their families from public services, have been the right choices at the right time.
As Finance Minister Bill English says, we go into this year's election focusing on managing growth, rather than on managing recession. Managing growth gives us far more choices about how we support New Zealanders and their families, particularly the most vulnerable.
We have a lot to do, a lot of ideas, and a lot to talk about, so the Cabinet has agreed that we should look at the steps that New Zealand would need to follow if it were to formally consider whether to change the flag. However, we will leave the real work until the next term of Parliament.
That also means that it will be under our existing flag that we will commemorate the centenary of the Gallipoli landings.
At dawn on April 25, 2015, here, and on the Gallipoli Peninsula, and at New Zealand diplomatic posts around the world, we will lower to half-mast the same flag under which our forefathers fought so valiantly, so far away, a hundred years ago.
It is under the existing flag that we will remember the sacrifices made by New Zealanders in battle, and the sacrifices made by their families.
I do not under-estimate the significance of the flag to New Zealand's servicemen and women and their families, but being respectful of our history does not lock us permanently in the past.
Organisations like our armed forces have undergone significant change over the generations. What does not change is their willingness to defend on behalf of all New Zealanders the values that define us and which we cherish.
Those values and our commitment to uphold them will not be compromised or eroded in any way by a change of flag. From time to time, countries do change their flags. If we do it, we won't be the first and we won't be the last.
If New Zealanders choose a new flag, it will serve us in times of celebration, and in times of mourning.
It will be the flag that is hoisted at a medal ceremony as we celebrate the achievement of an individual or team that has done our country proud.
And it will be the flag that is lowered to half-mast as we mourn together the passing of a New Zealander who has made a significant contribution to the affairs of our nation.
It will be the flag that serves us on every occasion because, in the end, the flag is a symbol of our unity. Our allegiance to it symbolises the bond we share for each other, and for this country that we have the good fortune to call home.
If we choose well, it will become internationally recognisable in a way that our current flag is not, despite more than a hundred years of use.
As I say, change can be difficult but it's also remarkable how quickly the new becomes familiar.
A flag can never be all things to all people. As we consider alternative designs, there might be some people who want a stronger representation of our Maori heritage, or of our flora and fauna. The colours we might choose to represent us are, right now, far from certain.
Long decades of sweat and effort by our sportsmen and women in many codes over countless competitions give the silver fern on a black background a distinctive and uniquely New Zealand identity, and a head start in our national consciousness.
For example, it's our silver fern, rather than our flag, that's etched in the crosses marking the final resting place of all New Zealanders who are interred in Commonwealth War Graves overseas.
Interestingly, it's the maple leaf that's etched in the crosses of Canada's fallen in those same cemeteries.
I admit to liking the silver fern but I'm also open to other ideas and designs.
So I come to this debate advocating change, and with a personal leaning towards the silver fern, but I also want to listen to the debate, and see the possibilities before making up my mind on my preferred design.
I urge others to do the same.
For people who have doubts or concerns, I want to give a clear assurance and commitment that retaining the current flag is a very possible outcome of this process, and there will be no presumption in favour of a change.
I would like us to enter this discussion with open minds and a shared sense of purpose and privilege about our task.
Most important, I think, is that the designs from which we eventually choose are unique, confident and enduring.
We want a design that says "New Zealand" in the same way that the maple leaf says "Canada", or the Union Jack says "Britain," without a word being spoken, or a bar of those countries' anthems being heard.
We want a design that says "New Zealand," whether it's stitched on a Kiwi traveller's backpack outside a bar in Croatia, on a flagpole outside the United Nations, or standing in a Wellington southerly on top of the Beehive every working day.
It's really important that consideration of a new flag includes genuine input from New Zealanders. All voices need an opportunity to be heard.
It's also important, in my view, that these discussions and debates happen outside party politics.
So next term, should I have the privilege of remaining as prime minister, soon after Parliament re-commences I will write to the leaders of all political parties represented in Parliament. I will ask them to nominate an MP to join a cross-party group to oversee the flag consideration process.
That cross-party group will have the task of recommending the best referenda process to follow. For example, it would look at the question, or questions, that would need to be asked in a referendum.
The cross-party group of MPs will also be involved in nominating New Zealanders from outside Parliament to form a steering group, which will have primary responsibility for ensuring that the public has the opportunity to engage in the debate.
One of the tasks of that steering group will be to seek submissions from the public on flag designs.
As I said, the role of the MPs' group will be to make recommendations on the best way to proceed so I can't give you more details about the process just yet.
But I can make the commitment that there will be genuine public engagement, including the opportunity for people to submit designs and suggestions, and that ultimately the decision on whether or not to change the flag will rest with New Zealanders themselves.
I would like to see the referendum process completed during the next Parliamentary term, so it does not intrude on the 2017 elections.
Cabinet has asked officials to give advice on the best way to set up these various processes.
Finally, I want to say that I am not putting the flag debate on the table today.
It's already on the table, and it's been there quite a long time.
But until now the debate's been mostly conducted via letters to the editor, editorials, opinion polls and by a few passionate adherents of designs that some people happen to champion.
My purpose today is to say that this debate is too important for it to continue rumbling on in such a casual and ad hoc fashion.
The time has come to discuss the flag formally, carefully and respectfully, allowing all New Zealanders to have their say.
Only by doing that will we arrive at a point where we have an answer that we will all then be bound by for a long time.
If together we support a new design, then it will be with the understanding that it will serve and represent us for the rest of our lives.
If, on the other hand, we reject change then my view is that the people will have spoken and the idea should be shelved for a good long time.
I have raised this now because as Anzac Day approaches, and we turn our minds to the countdown to next year's centenary, we will reflect on our past but also think about our future.
In my view, that's an appropriate time to write one small but significant new chapter in our national story by re-considering the flag.
It's my observation that each generation of New Zealanders is becoming more confident about asserting their Kiwi identity. That's because we're increasingly comfortable in our Kiwi skin.
When we go out in to the world, we do so with a strong sense of where we come from.
Our flag should reflect that.
I urge you all to think about it, and to have your say when the time comes.
For my part, I will embrace the opportunity for us to come up with a New Zealand flag that reflects and celebrates our New Zealand-ness, and that inspires us to do the same.
Then, I think, the flag will be serving us in the same way that we serve it.
Thank you.
