Major General Rhys Jones is to replace Lieutenant General Jerry Mateparae as chief of the New Zealand Defence Force early next year and will face the task of cutting $400 million a year from defence spending.

Prime Minister John Key announced Major General Jones' appointment and promotion to the rank of Lieutenant General yesterday. Major General Jones, who has been head of the Army since May last year, takes up his new role early next year when Lieutenant General Mateparae leaves to take charge of the Government Communications Security Bureau.

"He has the strategic leadership, intellectual capacity, management experience and personal qualities the new position requires," Mr Key said.

He has been appointed for an initial three-year term rather than the more usual five years.

Mr Key said that was primarily because of "the big job" in front of Major General Jones in his new role in relation to the "value for money" exercise the Defence Force is to undergo.

"We want to make sure we're in a position to monitor that progress."

A policy review released last month suggested significant changes to every arm of the Defence Force to gain greater efficiencies of operation from a severely constrained state purse.

The review identified the need for up to $400 million in annual savings, which may include up to 1400 military jobs being converted to civilian roles and greater participation by the private sector in infrastructure development, facilities maintenance and provision of support services.

Major General Jones was likely to have his term extended if his management of this process was satisfactory, Mr Key indicated.

Major General Jones, 50, enlisted with the Army in 1978, graduated from the Royal Military College, Duntroon, Australia in 1982 and has held a variety of operational, training and senior command roles.

He is married with three children.