Government Super Fund to reduce bond portfolio

Data Flash (New Zealand) Government Super Fund to reduce bond portfolio

Finance Minister Cullen has announced changes to the management of the Government Superannuation Fund (GSF). The Fund covers public sector pension liabilities and currently employs its own portfolio managers.

Current asset allocation

Current assets of the Fund are valued at NZD 3.4 billion, invested exclusively in cash and domestic fixed interest securities.

We estimate that government bond holdings correspond to about 16-17% of total stock in the NZ market.

Proposed changes

Diversified investment strategy:

In order to increase investment returns and to reduce the annual contribution the Crown has to pay the Fund in the form of deferred employer contributions, the Fund will be allowed to diversify its investment portfolio. Dr Cullen specifically noted that the Fund would be able to invest assets in domestic and overseas equities, but we assume that investments will also include international bonds.

In terms of the influence on market conditions, Dr Cullen noted that `... the Fund will be diversified gradually so that the change can be absorbed by the financial markets with minimum disruption to Government stock rates, derivatives and interest rates more generally.'

Governance arrangements:

In order to achieve a clear separation between the management of the Fund and the Minister of Finance, the Government will establish a GSF Board, which will oversee the Fund's investment activity and `. ensure the assets are invested on a sound commercial basis'.

The Board will appoint private fund managers and custodians, who will conduct the actual investment under the Board's instruction.

Timing and market implications

Dr Cullen stated that the legislation required to implement the changes would be introduced `..within the next few months'. Given the normal legislative process and the time required to establish an investment board, we estimate that the implementation of the changeover to private fund mangers will not commence until Q4/2000 at the earliest.

Applying average ratios of diversification between domestic and offshore assets and between bonds and equities, we estimate that the Fund would reduce its holdings of domestic fixed interest securities by around NZD 1.2-1.5 billion - either through sale or the non- reinvestment of maturities. We expect that process to commence in early 2001 and, due to the intended gradual implementation, take up to 6 months.

With the necessary legislation not yet in place, the GSF has limited means to prepare for the portfolio changes within its near-term investment strategy. However, we may see a gradual move towards a shorter duration of the current portfolio. However, with no pressure to implement this change over a certain period of time, the market impact is likely to be minimal.

Ulf Schoefisch,
Chief Economist, New Zealand

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