Investment of the Natural Disaster Fund

Ministerial Direction

Ministerial Crest. Office of Hon Dr Michael Cullen
Treasurer
Minister of Finance
Minister of Revenue
Minister for Accident Insurance
Leader of The House of Representatives


Mr Neville Young
Chairman
Earthquake Commission
PO Box 311
WELLINGTON


Dear Neville

DIVERSIFICATION OF THE NATURAL DISASTER FUND

Thank you for your letter of 16 October 2001. Pursuant to Section 12 of the Earthquake Commission Act 1993 I now issue a new direction regarding investment of the Natural Disaster Fund. The direction will take effect from 1 November 2001, on which day I intend to lay a copy of it before the House of Representatives.

Yours sincerely
Micheal Cullen's signature.

Hon Dr Michael Cullen
Minister of Finance


Attachment: Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993.

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Ministerial Crest. Office of Hon Dr Michael Cullen
Treasurer
Minister of Finance
Minister of Revenue
Minister for Accident Insurance
Leader of The House of Representatives


Direction to the Earthquake Commission pursuant to Section 12 of the Earthquake Commission Act 1993.

  1. This direction comes into effect on 1 November 2001 and as of that date the direction dated 2 June 1998 is hereby revoked.
  2. The Earthquake Commission (the Commission) shall invest the Natural Disaster Fund (the Fund) in:
    1. NZ Government securities comprising Treasury bills and/or Government stock and/or Inflation-Indexed Bonds tradeable only through the NZ Debt Management Office;
    2. global equities; and
    3. New Zealand bank bills.
  3. The Commission shall invest the Fund with the objectives of:
    1. achieving an average rate of return of at least 1% per annum over the Crown's cost of borrowing over a rolling ten year period (where the Crown's cost of borrowing is measured by the change in the CSFB New Zealand Government Stock Gross Index);
    2. subjecting the Fund to no more than 1 chance in 4 that over any 10 year period the annual rate of return will be less than the Crown's cost of borrowing; and
    3. ensuring that there is no more than 1 chance in 30 of the Fund incurring an investment of less than negative 2% in any one financial year.
  4. The Commission must invest the Fund on a prudent, commercial basis, and in doing so, must manage and administer the Fund in a manner consistent with:
    1. best practice portfolio management;
    2. maximising return without undue risk to the Fund as a whole; and
    3. avoiding prejudice to New Zealand's reputation as a responsible member of the world community.
  5. The Commission must prepare, and adhere to, a statement of investment policies, standards, and procedures for the Fund that is consistent with paragraph 4 of this direction.
  6. The Commission must review those investment policies, standards, and procedures for the Fund at least annually.
  7. A statement of investment policies, standards, and procedures must cover (but is not limited to):
    1. the classes of investments in which the Fund is to be invested and the selection criteria for investments within those classes;
    2. the determination of benchmarks or standards against which the performance of the Fund as a whole, and classes of investments, will be assessed;
    3. standards for reporting the investment performance of the Fund;
    4. ethical investment for avoiding prejudice to New Zealand's reputation as a responsible member of the world community;
    5. the balance between risk and return in the overall Fund portfolio;
    6. the fund management structure;
    7. the use of options, futures, and other derivative financial instruments;
    8. the management of credit, liquidity, operational, currency, market, and other financial risks;
    9. the retention, exercise, or delegation of voting rights acquired through investments;
    10. the method of, and basis for, valuation of investments that are not regularly traded at a public exchange; and
    11. prohibited or restricted investments or any investment constraints or limits.
  8. The Commission must consult with the Minister of Finance (the Minister) if it intends to modify the statement of investment policies, standards, and procedures to any substantive degree.
  9. The Commission must consult with the Minister if it intends to modify the portfolio composition from the following:
    1. NZ Government securities;
    2. up to a maximum of 35% of the market value of the Fund in global equities; and
    3. up to a maximum of $250 million of New Zealand bank bills.
  10. The Commission must consult the Minister if it forms the intention to cover its pre-disaster currency exposures and may not proceed with the implementation of a hedging strategy without the consent of the Minister being first had and obtained.
  11. In the event of a major natural disaster likely to involve claims on the Commission in excess of $250 million the Commission must consult with the Minister before liquidating any part of the investment portfolio of the Fund apart from the holdings of New Zealand bank bills.
  12. If the Commission considers at any time that any provision in this direction is inconsistent with another provision in this direction or any other direction under Section 12 of the Earthquake Commission Act 1993 or any provision under that Act it shall advise the Minister of that inconsistency.

Yours sincerely
Micheal Cullen's signature.

Hon Dr Michael Cullen
Minister of Finance

30 October 2001

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