"The change will not affect GSF members' entitlements which will continue to be Crown guaranteed.
"But it will deliver significant savings to the taxpayer," Dr Cullen said.
The Government Actuary estimates that the policy could reduce the amount the Crown pays the fund in the form of deferred employer contributions by between $14 million and $44 million a year.
"That is money the Government could better use elsewhere," Dr Cullen said.
The GSF now held most of its investments in bonds. Under the planned diversification, it would be able to invest more in New Zealand and overseas shares.
"The fund, which is currently valued at $3.4 billion, 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."
The new system would require new governance arrangements to achieve a clear separation between the management of the fund and the Finance Minister. Legislation to establish this would be introduced within the next few months.
"A GSF Board will be set up as a Crown Entity to ensure the assets are invested on a sound commercial basis. The board will have the use of the management and support services of the National Provident Fund.
"Private fund managers and custodians will conduct the actual investment under the Board's instruction.
"The aim of the changes is to improve the income stream flowing to the fund from its investments and to reduce the costs of the scheme to the taxpayer. I am confident it will achieve both these things," Dr Cullen said.
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