High-level choices in the financial portfolio
Any government faces choices in relation to what financial assets it will invest in, what debt and other liabilities it will take on or reduce and how financial risks will be managed. There is also a range of choices for managing and matching the performance of financial assets to their underlying liabilities and, over and above this matching, for what level of additional risk, if any, the Crown is willing to take on in order to meet its objectives.
Currently the responsibility for managing financial assets is devolved to individual Crown agencies and will depend on:
Policy settings: Policy decisions impact on what the Crown owns and owes. For example, ACC liabilities depend on the entitlements under the ACC scheme which can be changed.
Funding levels: Choices exist over which expenses are funded in advance and the level to which they are funded. The Government's current policy is to move towards having EQC and ACC (except for residual claims relating to the Non-Earners' Account) fully funded and future New Zealand Superannuation payments partially pre-funded. There is also a choice as to how fast these funds build up (eg, ACC levies could be raised to allow for a faster build-up of financial assets, moving towards full funding sooner).
Investment parameters: Parameters can be set as to what type of assets the Crown invests in, such as the mixture of debt and equity instrument holdings, whether to maintain a certain level of investment in New Zealand companies and whether to invest only in listed companies or to take an equity share in privately owned companies (eg, NZSF's recent purchase of 50% of Shell's New Zealand assets). These decisions will depend on the Crown's underlying risk tolerance and will in turn impact the risk profile and returns generated by these assets.
Portfolio management: The organisations holding these assets can either actively or passively manage their portfolios and either manage their portfolios in-house or outsource them. The approach to portfolio management currently varies between CFIs. The way in which the portfolios are managed will impact the level of returns achieved and the level of fees paid to fund managers.
Institutional arrangements: At present the five CFIs are separate entities. A single fund manager across CFIs might increase efficiency and overall performance, and enable better aggregate risk management across the financial portfolio. The institutional arrangements for governments' borrowing activities vary globally. Many countries have adopted a similar approach to NZDMO or a variation of it.
