Cullen can give Guardians directions

Clearly the most significant element of the Crown’s asset holdings in future will be the New Zealand Superannuation Fund. The fund will have positive contributions for the next 25 years. After its first 10 years the fund is forecast to have approximately $30 billion under management, and after 25 years approximately $100 billion.

Since we are just in the process of appointing the fund's guardians, I do not wish to pre-judge the detail of the investment policy and fund management structure that they will adopt.

The concept of fund guardians is a new one, but the legislation establishing the fund outlines a number of processes which make clear their powers and responsibilities, and will require the guardians to invest the fund on a prudent commercial basis.

The guardians must manage the fund in a manner consistent with best practice portfolio management and with maximising the return to the fund without undue risk.

In managing the fund, the guardians must also "avoid prejudice to New Zealand’s reputation as a responsible member of the world community". They must establish investment policies, standards and procedures and review them annually. These are published in an annual statement, and each year the guardians must publish a report that certifies whether or not the investment policies, standards and procedures have been complied with.

To round things out, at least every five years there has to be an independent review of how efficiently and effectively the guardians are performing their functions.

In light of all this, I think it is important to emphasise that the New Zealand Superannuation Fund exists primarily to achieve financial objectives in respect of offsetting the expected future costs of providing retirement income to the retiring baby boom generation.

There will be side effects. It will discipline short-term fiscal policy at a time when a favourable demographic structure might otherwise have tempted governments into tax or spending plans that would be impossible to sustain but painful to reverse. It will increase the level of national savings. And, it is likely to deepen capital markets.

However, it is not to be used as an instrument of government policy beyond its basic mandate.

The guardians have a clear legislative mandate to manage the fund in accordance with the principles set out in the Act. I may give directions to the guardians regarding my expectations of risk and return for the fund, and they must have regard to those directions, but I cannot give a direction that is inconsistent with the requirement that the fund be run on a prudent and commercial basis.

I would not expect that the guardians would view the New Zealand bond or equity markets any differently to another similarly sized fund seeking to maximise returns over the long term.

This illustrates again the government’s commitment to transparency. The bond and equity markets do not exist for any other purpose than to link investors into the real economy of New Zealand. Our goal is to transform that economy by working on the fundamentals to improve productivity and value creation. What we ask of the bond and equity markets and the various regimes that govern them is that they accurately present the opportunities and risks, so that those wishing to supply the financial capital to fuel New Zealand’s growth are able to make fully informed and mutually-beneficial decisions.