Appendix 4: Our recommendations

Guardians of New Zealand Superannuation: Governance and management of the New Zealand Superannuation Fund.

High-priority recommendations

We recommend that the Guardians of New Zealand Superannuation:

  • adopt a formal Board Charter, make it publicly available, incorporate the measures adopted in the Charter as part of their annual Board performance assessment process, and use the Charter to guide their external reporting. (Recommendation 2)
  • update their Risk Management Framework so that relevant risk management activity is identified in important areas of the operations. This update should include preparation of risk plans, incorporating risk management measures into executive performance assessment, and linking risk to service level requirements and policy development. (Recommendation 3)
  • assess the scope of the Board's current and future capability by initiating a regular independent assessment of the Board's combined capability relative to appropriate international peer organisations, and by conducting exit interviews as members retire from the Board. (Recommendation 6)
  • prepare a long-term operational strategy detailing how the Fund will be administered in the future. The purpose of the strategy is to set out the long-term operational objectives of the Guardians. This could include external provider management, overseeing of fund administration, alternative asset research, investment strategy development, and responsible investor guidance. (Recommendation 18)
  • put in place a transparent process that they can follow if they are required to set a level of remuneration for specialist skills outside the current approved levels. (Recommendation 24)

Other recommendations

We recommend that the Guardians of New Zealand Superannuation:

  • update the terms of reference documents for their Board committees and executive committees to better reflect governance standards promulgated by global regulators. (Recommendation 1)
  • in their 2008/09 internal audit plan, target high-risk processes as identified by their Risk Management Framework for assurance on a set timetable (for example, every two years). (Recommendation 4)
  • further develop and refine standard reporting to support the separation of Board and management responsibilities. This should include assessing management decision-making within predefined parameters approved by the Board. (Recommendation 5)
  • formalise their internal audit framework by establishing an Internal Audit Charter (consistent with the guidance of the Institute of Internal Auditors), a service level agreement with their internal audit provider, and by carrying out three-yearly peer reviews of the services provided by their internal audit provider (consistent with the Institute of Internal Auditors' peer review framework). (Recommendation 7)
  • extend their screening of investments in excluded companies or entities to all security positions, including debt or fixed interest securities. (Recommendation 8)
  • review how the Board approves investment activity to ensure that responsibility for investment decisions is delegated to management where appropriate. (Recommendation 9)
  • formalise the periodic independent review of the Strategic Asset Allocation, and consider independence from management when selecting the investment adviser to conduct the review. The scope of work agreed with the adviser should also include validation of individual asset class benchmarks applicable to the Strategic Asset Allocation. (Recommendation 10)
  • review their business operating model periodically to ensure that all aspects of their business (including whether operations are outsourced or done in-house) enable the objectives of the Fund to be met effectively and efficiently. (Recommendation 11)
  • link their Investment Manager Selection Policy with their process for conducting due diligence over Investment Manager appointments. This includes linking qualifying criteria to the policy, documenting how ratings and weightings are applied, and documenting how assessment elements are set, changed, and approved. (Recommendation 12)
  • amend their Investment Manager Selection Policy to include an assessment of the anti-money laundering management philosophies of prospective Investment Managers, and that this assessment becomes part of the ongoing assessment process for Investment Managers. (Recommendation 13)
  • establish a policy on fees for Investment Managers that sets out the types of performance fees available and criteria for awarding a performance fee. (Recommendation 14)
  • either:
    • change the definition of listed securities in the Strategic Asset Allocation so that it also includes unlisted securities where they are held as part of the largely listed security investment mandate; or
    • require that unlisted securities, regardless of their investment mandate, be classified as Private Markets assets.
  • Once this treatment is clarified, the compliance management process should be changed accordingly. (Recommendation 15)
  • initiate a formal process to allocate the operating and administrative costs of the Fund to the respective individual investment classes for which those costs have been incurred. (Recommendation 16)
  • develop a long-term information technology strategy and align it with an overall operational strategy. (Recommendation 17)
  • prepare policies in relation to risk management, training and development, external provider management processes, and legal compliance. (Recommendation 19)
  • link their governance processes and reporting to the principles of corporate governance promulgated by the New Zealand Securities Commission. (Recommendation 20)
  • update their Delegations and Sub-Delegations Authorities Policy, including consolidating delegations currently recorded in other policies and governance documents into one Delegation of Authority Policy. (Recommendation 21)
  • routinely monitor and test how they segregate duties, to ensure that no one person controls two or more phases of a transaction or operation. Testing of segregation of duties should be included in the Guardians' annual internal audit plan. (Recommendation 22)
  • prepare a long-term human resources plan consistent with their broader operational strategy. (Recommendation 23)
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