English Bill: New Zealand Superannuation and Retirement Income Amendment Bill — Second ReadingText is incorporated into the Bound VolumeEnglish Bill: New Zealand Superannuation and Retirement Income Amendment Bill — Second Reading[Sitting date: 07 May 2015. Volume:705;Page:3315. Text is incorporated into the Bound Volume.]Hon BILL ENGLISH (Minister of Finance):I move That the New Zealand Superannuation and Retirement Income Amendment Bill be now read a second time. First of all I would like to thank the chair David Bennett and the members of the Finance and Expenditure Committee for their report. It was good work on what is quite a technical piece of legislation. However it is an important piece of legislation. The New Zealand Superannuation Fund is a large and growing part of the Crown’s total balance sheet and it will continue to grow. At the end of March the New Zealand Superannuation Fund had over $29 billion in funds under management. In the last 10 years this has been a very significant addition of financial management and financial risk to the Crown balance sheet. Over time along with the other funds it will become a more and more significant part of the economy.The fund was well set up originally by Dr Cullen in the previous Labour Government with a very clear governance structure in the first place to prevent politicians from being able to exert influence over this now substantial fund which will grow to a much larger size than $29 billion and in the second place to administer the fund in a way that encourages the good governance and management of the fund. Certainly judging by its returns it has functioned competently.This bill is aimed at administrative improvements not governance changes. It should lead to some cost reduction. For those who are familiar with the financial services sector they will know that even small reductions in costs and fees have a big impact over time. Small reductions achieved through this bill will have a big impact in 2030 2040 and 2050 when people who today are only 25 or 30 years old will be in a situation where the Government is drawing on that fund to support their retirement.The bill implements changes in Part 2 of the New Zealand Superannuation and Retirement Income Act. The bill will allow the Guardians of New Zealand Superannuation as the managers and administrators of the fund to control entities formed for the purpose of holding or managing investments of the fund described as fund investment vehicles. 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. That has had the effect of preventing it from using some pretty well-tried and tested fund management instruments.Enabling the guardians to structure and access investments more efficiently should result in better performance of the fund. The guardians will still be prevented from holding or taking substantial controlling interests in any underlying operating entity whether directly or through the use of a fund investment vehicle. The bill will not change the investment universe available to the guardians and that is a pretty critical point. It does not remove any restrictions that currently exist on their ability to have a substantial controlling interest; it simply enables them to use these particular types of investment vehicles. This is consistent with the guardians’ mandate. It is particularly pertinent to their fiduciary duty to maximise return without taking undue risk for the fund as a whole.The bill will also make administrative changes aimed at increasing the efficiency with which the fund’s assets are managed. These include giving the guardians some delegation powers. Importantly the board will still be responsible for the actions of any delegate acting under the delegation. I am informed that all of the submitters provided useful suggestions and comments. In particular the Legislation Advisory Committee provided specific recommendations to clarify wording around the bill’s validation clause—that is clause 5 the validation provisions—and to clarify whether fund investment vehicles would be subject to the Official Information Act.The committee decided that fund investment vehicles should be excluded from the Official Information Act given the investment risks this would pose. However the committee was comfortable that there are sufficient safeguards around this given that the Guardians of New Zealand Superannuation are subject to the Official Information Act. I must say that the transparency of its reporting has meant that at least in my role as the Minister responsible for the guardians I have had very few Official Information Act requests and that is as it should be. Every New Zealander needs to be able to see what is happening with a $29 billion fund that will exist for the next 40 or 50 years.The select committee was also concerned to ensure that the ability to use fund investment vehicles did not undermine the principles of section 59 of the New Zealand Superannuation and Retirement Income Act. This is the section that prevents the guardians from controlling any entity. The committee was comfortable that the guardians’ approach to date has struck an appropriate balance between the need to maintain a balanced portfolio by investing in 100 percent of some real assets such as farms and forests and a requirement to not control entities. This is particularly relevant in the New Zealand situation where a $29 billion fund can pretty quickly own a significant proportion of the assets available for it to invest in. As the fund grows from $29 billion to who knows what—$39 billion $49 billion or $59 billion—there is even more of a challenge in a small economy such as ours. The committee wanted to ensure that the guardians maintain this balance in the future so it inserted new clauses to provide that the Minister of Finance could approve fund investment vehicle investments or classes of investments that go beyond a passive holding of financial products.The way the fund is organised to manage the significant risk it is taking on is critical. In recent years the fund has made high returns. It can make such high returns only by taking fairly significant investment risks. This means inevitably it will also sometimes make negative returns. I think this is an important point. In the shorter term the fund has been a stellar performer returning over 20 percent on its funds under management. But in the long run it is very difficult to beat the market average returns which these days are much lower than 20 percent. At some time no matter how competent and professional this fund is it is likely to make negative returns.So I am intending here to introduce a Supplementary Order Paper in the Committee of the whole House on the bill. As I said in the bill’s first reading the biggest risk to the taxpayer around this fund is politicians getting involved and overriding the legislation and interfering with the management of the fund. I appreciate that there is a balance of views here and it is a bit of a fine line. However in my view it is not consistent with the guardians’ independence as originally set up by Dr Cullen in a very thorough manner and supported I think by most of the Parliament at the time. That independence means that the Minister of Finance should not be approving investments or classes of investments. That is why I want to introduce a Supplementary Order Paper that will remove the clause—as recommended by the select committee—for ministerial approval over investment decisions. I agree with the select committee that the guardians have struck the right balance and I believe it is the guardians’ ongoing role not the role of Ministers to ensure that that balance continues.I want to acknowledge and thank the committee members and the submitters for the time and effort that they put into that particular issue because it is a complex one. I am comfortable that the controls in the Act and the bill ensure the guardians will not use the fund investment vehicles to expand the scope of what they can and do invest in. These controls include that the bill limits the use of fund investment vehicles consistent with the fund’s existing mandate and the requirements of the guardians’ statement of investment policy standards and procedures to include the governance framework for the implementation and operation of the fund investment vehicles.If this fund were to show that it could not find that balance remaining independent then I am sure the Government would want to see legislative action taken but 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. It is best to leave those decisions to the guardians of the fund. Thank you.