Home / Increased NZ Super powers could help Future Fund

(Bill English)
The New Zealand Superannuation Fund (NZS) has won important concessions in soon-to-be-passed legislation that allows it to assume majority control of some investment entities and fences certain underlying assets from public scrutiny. This could help the Future Fund lobby the Australian Government to relax some of its restrictions.
Under the New Zealand Superannuation and Retirement Income Bill, now divided into two separate pieces of legislation, the NZS will be able to create fund investment vehicles (FIVs) that may take majority control of some entities.
While Australia’s Future Fund has not publicly criticised the main restriction on its investment operations under its formation legislation, the fact that it is forced to use agents in the investment process runs against the trend for other large fiduciary funds in Australia. The Future Fund must invest via external fund managers.
Mind you, the Future Fund would be hard pressed to demonstrate that the restriction has hindered its performance over the past few years. The fund has been one of the best-performing sovereign wealth funds in the world since it commenced investing in 2007-2008.
While luck (it’s formation as the GFC was starting to appear on the horizon) allowed it to pick the bottom of the market, subsequent asset allocation and manager selection decisions have demonstrated significant outperformance. The Future Fund has an absolute return benchmark of CPI plus 4.5 per cent. In the five years to last year it has returned 11.2 per cent a year.
As the NZ bill passed through its second reading last week, Finance Minister, Bill English, said: “This has been important because there are restrictions in the current legislation that prevent this fund from being a majority owner of any particular investment.”
NZS had pushed for the new FIV rules, claiming they increased its investment flexibility while potentially reducing admin costs by up to NZ$50 million. Earlier advice from Treasury questioned the cost savings but still supported the changes.
“We note that the $50m cost estimate over the life of the fund to date includes around $25m of costs from large short term movements in particular investments,” the Treasury note says. “It is quite possible that these valuation changes could have moved in the opposite direction or reversed themselves over time. There will be cost savings from reduced tax leakage and administrative costs but these are very modest given the overall size of the fund.”
English also went beyond the recommendations of the parliamentary select committee, scratching out clauses that would have given the Finance Minister the power to approve FIV investments and set the “governance framework” for the entities in question.
“… it is certainly my experience, as the current custodian of the Crown balance sheet of $250 billion, that it is best to have these assets managed by people who know what they are doing, with clear parameters framed by the Government, rather than have the Minister of Finance involved in complex investment decisions that, speaking only for myself-at least, this Minister of Finance would not know what he was doing,” English said during the parliamentary debate. “It is best to leave those decisions to the guardians of the fund.”
Ironically, it was English who in 2009 pushed the NZS to increase its exposure to local assets, targeting “40 per cent of the Fund being invested in New Zealand”. That requirement appears to have fallen by the wayside, with English – and his National Party colleagues – praising NZS’ performance, purpose and governance during the debate on the new legislation. National voted against the 2001 legislation that formed the NZS.
The proposed law also exempted the Super Fund’s FIVs from the Official Information Act. Treasury previously backed the exemption, saying while the government had “the ability to withhold commercially sensitive information under the OIA, there is the potential that applying the OIA to FIVs could reduce their effectiveness by discouraging the participation of private investors”.
Opposition Labour Party MP, Grant Robertson, supported the exemption as long as the NZS maintained the “same level of transparency” as it provided now.
“[The OIA exemption] does not mean that the fund is not open to scrutiny for particular types of investment, and at the time that this arose we learnt of the nearly $200 million that had been lost in the investment into the Portuguese bank, the Banco Espírito Santo of Portugal,” Robertson said during the debate. “We are still concerned on this side of the House about the cash fund that is used for those investments. Investments that go through several pairs of hands will be inherently more risky, and in this case they were trying to save a bank that was already known to be in trouble.”
The bill passed its second reading with only 13 Green Party MPs voting against it.
– David Chaplin and Greg Bright