Mercer praises super Guardians

ROB KITCHIN/Dominion Post

BIG TICK: NZ Super Fund Guardian chief executive Adrian Orr says most changes recommended by Mercer have already been made.

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Those pulling the strings at the New Zealand Superannuation Fund have received a big thumbs-up for their management and investment practices in a strongly supportive appraisal by global investment consultant Mercer.

Despite enduring a torrid 18 months, during which Crown contributions were suspended and investment returns were affected by the global crisis, the fund remains on track to meet its long-term objectives.

The New Zealand Superannuation Fund was introduced in 2003 as a means of offsetting, or "smoothing" future costs. It operates as an investment fund that accumulates and invests Crown contributions paid out of general taxes.

Treasury predicts that the funds under management will top $81 billion by 2030.

Mercer was appointed by Finance Minister Bill English to review how effectively the fund's Guardians have been performing their functions. The Guardians are those responsible for establishing investment policies, standards and procedures for the fund.

Mercer concluded that all was well behind the scenes at New Zealand's $15.2b retirement nest egg.

"Mercer believes that the Guardians is well positioned to meet its investment objectives and thereby achieve a smoothing in the rate of increase in the general tax burden," its review said.

The report said that in the six years since starting fund investments, the Guardians had put in place a comprehensive array of policies and processes towards achieving goals set out in 2001.

By law a review of the Guardians is carried out every five years.

And although the report was not without its recommendations, Super Fund chairman David May and chief executive Adrian Orr said the Guardians had, in most cases, already made those changes as a matter of course.

"We are pleased that the vast majority of the subsequent recommendations in the review are endorsements of actions we are already undertaking – some of which are now complete," they said in a joint statement.

The review backed the fund's strong weighting toward growth assets – between 70 and 90 per cent – and said management fees and structures were competitive for a fund of its size.

Outside the highly technical areas of strategic asset allocation and active management, there was a suggestion the fund could reduce its short-term volatility by further reducing currency hedging levels.

After taking a magnifying glass to the fund's several investment portfolios, Mercer concluded that the performance of the Guardians was "broadly consistent" with other funds of the same purpose over the five-year period.

Looking purely at returns, the fund grew rapidly from inception, peaking in late 2007.

It hit the skids last year and this year as the global financial crisis led to a big selloff of global growth assets.

Since inception, the fund has returned 24.3 per cent at an annualised rate of 3.9 per cent, causing it to underperform its own target – to beat the 90-day Treasury bills plus 2.5 per cent a year – by a yearly average of 5.26 per cent.

The bulk of the underperformance, however, happened during the height of the global financial crisis.

"The fund outperformed the benchmark in the 2005, 2006, and 2007 financial years.

"In the last financial year, the fund under-performed against the benchmark by 3.9 per cent, and in the process lost all of the added value of the preceding years," Mercer said.

Stripping out home currencies, other sovereign wealth retirement funds performed just as badly over this period.

Mercer said that temporary suspension of the $2 billion annual contributions by the Government would slow down the rate of growth in the fund, but its long-term nature meant long-term horizons were achievable.

- © Fairfax NZ News