Taming Politics: NZ Superannuation Fund and Good Governance

Ashby Monk

One of the primary areas of concern associated with SWFs is the extent to which politicians can influence investment decision-making so as to achieve political (instead of economic) ends. This concern has been acute during the financial crisis, as many funds have been faced with unprecedented political pressure to go outside of their original mandates in order to revitalize domestic economies through stimulus. While some funds may have been set up for for just that purpose, other types of SWFs (such as pension reserve funds) were never intended for bailouts.

So the financial crisis has offered a good stress test of the governance systems that these reserves funds have put in place to tame the influence of politics. Some reserve funds, such as Ireland’s National Pension Reserve Fund, were incapable of withstanding political influence. However, new evidence suggests that other funds may have robust governance protocols that can mute political interests, such as the New Zealand Superannuation Fund.

New Zealand’s Minister of Finance Bill English wrote to David May, Chair of the Guardians of the New Zealand Superannuation, on May 14 asking that the Fund substantially increase its domestic investments.

“The government believes that it is in the national interest for the Fund to have significant investments in New Zealand…Opportunities that would enable the Guardians to increase the allocation of New Zealand assets in the Fund should be appropriately identified and considered by the Guardians.”

While the Honorable Bill English notes that the fund should maintain its commercial focus, the message is clear: ‘We need to use this big pile of money to stimulate our economy’. However, if the Fund agreed to such a demand, it would be forced to go outside its current mandate. This could represent a profound governance failure.

In response, David May and Adrian Orr brilliantly deflected the political intrusion by falling back on their governance protocols.

“Given the unpredictable nature of future commercial, prudent, investment opportunities, we are unable to offer an assurance as to how much, if at all, the Fund’s New Zealand assets will increase. Much will depend on the frequency and scale of such commercial opportunities, and our confidence in satisfactory investment arrangements. To guarantee an increase to a prescribed percentage would require a modification to the Fund’s commercial objectives under 58(2) of the Act…In addition, while local investment activities may produce positive benefits (externalities) in assisting developing New Zealand’s capital markets, we can not take these externalities directly in account when making an investment decision under our current Act.”

In short, these authors are saying that if the politicians want the Fund to invest more in New Zealand (the Fund already has 18% of its portfolio in NZ, which represents an overweighting vis-a-vis NZ’s importance in global financial markets), then the politicians need to pass new legislation. Until such a time that this legislation is passed, the Fund will go about its job of creating a well-diversified portfolio of Superannuation assets so as to maximize returns.

Given that this fund was set up to manage population aging over the long-term, good governance practices likely saved it from being misdirected by politicians interested in stimulating the economy in the short term. By doing what it was set up to do (and only doing that), the long-term legitimacy of this institution seems to be assured.

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This website is a project of Professor Gordon L. Clark and Dr. Ashby Monk of the School of Geography and the Environment at the University of Oxford. Their research on sovereign wealth funds is funded by the Leverhulme Trust and The Rotman International Centre for Pension Management.

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