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

Parliament and the public can be confident that the Guardians of New Zealand Superannuation (the Guardians) are putting in place the types of internal control systems, processes, and procedures needed to prudently manage and govern the New Zealand Superannuation Fund (the Fund). The Fund was set up to contribute to the future cost of providing superannuation.

Our performance audit at the end of 2007 found that the Guardians’ internal control activities generally meet or exceed accepted international practices and guidelines for operating investment funds.

The Guardians’ internal control and governance processes have matured considerably since the organisation was created in 2001 to manage and administer the assets of the Fund.

However, the Guardians are still in the early stages of a long-term role. We expect that they will continuously review and change their approaches as the organisation grows, and in response to the challenges of a constantly changing investment environment.

There are some areas where the Guardians could make improvements. We have made 24 recommendations, of which five deserve a high priority.


New Zealand currently has a taxpayer-funded "pay-as-you-go" retirement income system, where eligible residents over the age of 65 receive a pension irrespective of their income or assets. This pension, known as New Zealand Superannuation, is funded out of general taxation.

As our population ages, there will be fewer people of working age compared to the increasing number of retired people. This will lead to significant pressure on fewer taxpayers to meet the increasing cost of providing New Zealand Superannuation in the next 20 to 50 years.

The Fund was created by the New Zealand Superannuation and Retirement Income Act 2001 (the Act) to invest Crown contributions to prepare for the expected growth in demand for pensions from an ageing population. The Government currently contributes about $2 billion a year to be invested in the Fund. The Guardians are a Crown entity established under section 58 of the Act to invest the Fund in a manner that is prudent and commercial, maximises return without undue risk, and avoids prejudice to New Zealand’s reputation.

The relationship between the Fund and the Guardians is similar to that of a "fund" and a "fund manager". The Fund holds the assets of the Crown, which are used to provide a portion of the expected future cost of providing New Zealand Superannuation. The Guardians set investment policies and investment mandates. The Guardians reinvest all investment returns into the Fund on a long-term basis.

The Guardians appoint Investment Managers who then trade securities on behalf of the Fund, such as buying and selling assets subject to the agreed investment mandates. The Board of the Guardians (the Board) also appoints a Custodian to carry out day-to-day portfolio monitoring and transaction administration.


There have been three main stages in the history of the Fund and the Guardians to date, which together represent the "establishment" and "initial development" phases:

  • setting up and determining the original Fund structure;
  • developing the investment strategy, Strategic Asset Allocation and individual investment mandates, and the appointment of Investment Managers and the Custodian; and
  • formalising the processes and executive management of the Guardians in accordance with their Statement of Intent for the period commencing 1 July 2007 to 30 June 2010 (2007 Statement of Intent).

An independent committee was established by the Minister of Finance in October 2001 to nominate people for the Guardians’ Board. On 26 August 2002, the Board met for the first time. The first task for the new Board was to establish the investment strategy and appoint advisers and senior managers.

In August 2003, the Guardians announced their first Strategic Asset Allocation for the Fund. On 30 September 2003, the Fund received an initial contribution of $2.5 billion from the Crown. Thereafter, the Fund received fortnightly contributions from the Crown based on an annual contribution schedule. The annual contribution schedule is determined and calculated by the Treasury, and sets out the timing and amount of each fortnightly payment from the Crown to the Fund. The cumulative amount in any given year represents the annual Crown contribution, which to date has been about $2 billion a year.

From September 2003 to August 2006, the Fund experienced significant growth. By June 2006, the Fund asset value was more than $10 billion and the Guardians had appointed a number of Investment Managers and a Custodian. The Guardians had also established information technology systems and business processes.

At the end of 2006, both management and the Board recognised that the establishment and early development phases of the Fund were complete. This created an opportunity to formalise processes through policies, procedures, and a risk management framework. The 2007 Statement of Intent set out a work programme for the Guardians to achieve this objective.

Our performance audit

We carried out a performance audit of the Guardians to provide independent assurance to Parliament about whether the Fund is being prudently governed and managed.

We assessed the Guardians’ governance and management of the Fund. We did not assess the performance of the Fund in terms of investment returns or the appropriateness of the Guardians’ investment strategy.

We engaged Ernst & Young to assist us because of the highly specialised nature of the Fund. We assessed:

  • the performance of the Guardians in the governance, management, and administration of the Fund; and
  • the adequacy of procedures performed by the Guardians in mitigating the risks arising from the rapid growth of the Fund.

This included looking at the effectiveness of:

  • governance arrangements;
  • policies related to application of the investment strategy;
  • contracts with Investment Managers;
  • monitoring and reporting Fund performance;
  • information systems; and
  • management practices and controls.

We compared the Guardians’ governance and policy framework to standards promulgated by regulators such as the Financial Reporting Council of the United Kingdom, Monetary Authority of Singapore, and the New Zealand Securities Commission.

The Guardians have implemented all significant requirements of these frameworks. The governance and operational approach adopted by management, and endorsed by the Board, concentrates on the legislative requirement to maximise long-term risk-adjusted returns while maintaining New Zealand’s reputation as a responsible member of the world community.

Our more significant observations and high-priority recommendations

We have made 24 recommendations (see Appendix 4 for the full list). Five recommendations are, in our view, a high priority for the Guardians to address. The others are more minor or relate to the ongoing work programme already initiated by the Guardians.

Our more significant observations and high-priority recommendations are summarised below.

Governance arrangements

While our performance audit has highlighted areas where the Guardians can further refine and improve governance structures, the purpose of the Guardians is clear and their performance can be assessed. The core governance arrangements of the Guardians have been in place since the start of the Fund. The 2007 Statement of Intent recognised the need to further develop executive processes and provide the Board with a broader reporting framework. The governance structures observed during our performance audit are largely consistent with what we would expect to see in a fund of this size and complexity.

The Board assesses the management of the Fund against commercial measures, including benchmarked returns and effective management of risk. The Board sets clear demands on management in terms of information, performance, and timeliness, and also seeks relevant independent advice where necessary to validate the accuracy and/or conclusions of management. The Board oversees the requirement for responsible investment by measuring actual performance against the policy of the Guardians.

The actions taken by the Guardians allow stakeholders to have confidence that adequate processes are operating to manage risks to the Fund.

Our high-priority recommendations for governance and risk management are:

  • the need to develop a formal Board Charter, make it publicly available, link the Board’s performance assessment back to elements of the approved Charter, and use the Charter to guide their external reporting (Recommendation 2);
  • the need to integrate risk management within important areas of the Guardians’ operations, including preparation of risk plans, incorporating risk management measures into executive performance assessment, and linking risk to service level requirements and policy development (Recommendation 3); and
  • the need to benchmark the collective capability of the Board to international peer organisations and to conduct exit interviews as members retire from the Board (Recommendation 6).

Investment strategy

The Guardians’ investment strategy for the Fund is to maximise long-term risk-adjusted returns. The Guardians achieve this by:

  • establishing an appropriate asset portfolio (referred to as the Strategic Asset Allocation); and
  • delivering returns for each asset class of the Fund’s portfolio that exceed appropriate performance benchmarks.

The Strategic Asset Allocation is detailed in the Statement of Investment Policy, Standards and Procedures (SIPSP). The Guardians regularly assess whether asset allocations and associated benchmarks are appropriate. The Guardians also assess ongoing compliance with benchmarks and determine new investment strategies as appropriate.

The Guardians aim to deliver returns that exceed performance benchmarks by constructing investment mandates that give the Fund exposure to growth within individual asset classes. These investment mandates are then outsourced to Investment Managers who are recognised leaders in either the asset class or the growth requirement that the investment mandate is focused on. Where the Fund holds assets generating investment income, such as dividends, the income is reinvested in accordance with the related investment mandate.

The Fund’s investment strategy is central to the activities of the Guardians. The Guardians obtain specialist advice, use global benchmarking, contract Investment Managers, and develop broad in-house capability to help ensure that the investment strategy supports the Fund’s long-term objectives.

The investment strategy is largely based on economic fundamentals. This means that the Fund is exposed to short-term market volatility. The Guardians manage this volatility in a number of ways.

The Guardians’ governing legislation creates a degree of certainty for the timeframe within which they can focus on growth of the Fund before they must also focus on liquidity. As the Fund approaches the point where Crown withdrawals start being made, its liquidity risk profile will need to change. Assets within the portfolio will need to generate investment income so the Fund can meet the Crown withdrawal requirements. The Guardians are aware of this and the likely effect it will have on the future asset allocation of the Fund. The periodic review of the Strategic Asset Allocation will ensure that growth assets are switched to income-generating assets in a timely manner.

We acknowledge the Guardians’ leadership to date, and encourage them to continue to lead and work with other Crown financial institutions on a common approach, where applicable, to responsible investment.

Managing and monitoring Investment Managers

The Fund’s investment strategy relies on identifying and realising growth within its asset classes. This approach has created the need for expert Investment Managers with specialised skills. The Guardians have adopted a deliberate programme to outsource investment management to meet this need.

The Guardians have recognised the risks associated with outsourced investment management and have developed appropriate processes to manage these risks. There is a high degree of awareness within the Guardians that, while processes can be outsourced, accountability for the outcomes cannot. This has led the Guardians to establish an extensive programme to select, monitor, and assess external providers. We reviewed this programme and concluded that it is consistent with all the material requirements of management practices for external providers that are promulgated by global regulators.

Monitoring and reporting of New Zealand Superannuation Fund performance

The Guardians have developed an extensive reporting structure for the Fund. This structure links Investment Managers, the Custodian, executive management, the Board, and the Minister of Finance to the reported information. There is limited intervention by the Guardians in information formally reported to these stakeholders. This increases the transparency and reliability of the information reported. Several processes operate outside this reporting framework to validate the accuracy and integrity of the information. These include reporting by the Custodian back to Investment Managers to validate month-end transaction processing, valuation of assets, and performance. Investment Managers are held accountable for information reported by the Custodian.

Information systems

The Guardians’ information technology infrastructure is well managed. The most significant information technology risks relate to systems used by the Custodian. However, the Custodian’s infrastructure and controls largely mitigate those risks and are regularly assessed by the Guardians.

The information technology risks to the Fund from the Guardians’ own information technology infrastructure are minimal. Notwithstanding this, the Guardians have followed good practice in implementing the Control Objectives for Information and Related Technology control framework, although they are still to finalise an information technology strategy.

Internal management practices and control

The Crown set up the Fund with an initial contribution and subsequent fortnightly allocation of cash during its first five years of operation. The gradual growth of the Fund has meant that policy and operational requirements have changed significantly since the Fund’s establishment. The 2007 Statement of Intent recognised the need to formalise policies and operational structures. It committed management to developing the operational infrastructure necessary to manage a mature Fund. This allows the Guardians to confidently manage the risks associated with their ongoing investment programme and operations.

The work programme completed under the 2007 Statement of Intent has established and formalised a considerable number of operational processes within the Guardians. However, at the time of our performance audit the Guardians did not yet have a final view on their preferred long-term operational and organisation structure, and how this best meets their investment strategy.

A major issue facing the Guardians is their ability to attract and retain highly skilled or specialised staff. The asset management industry is an internationally competitive talent market. It is common in their industry for key staff to be given strong incentives through targeted performance bonus schemes and remuneration arrangements. This industry-wide approach, combined with the specific asset growth focus of the Fund, creates a need for the Guardians to be able to compete to attract technical portfolio analysts with specialist asset management skills. If the Guardians cannot attract the right skills, they may suffer from lost opportunities or higher risks when implementing their investment strategy.

At the time of our performance audit, 26 of the Guardian’s 28 policies and related operational processes had been recently established and were still being implemented.

Our high-priority recommendations in relation to internal management practices and control are for the Guardians to:

  • prepare a long-term operational strategy (Recommendation 18); and
  • 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).
page top