Part 1: Introduction

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

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.

The New Zealand Superannuation Fund (the Fund) was established under the New Zealand Superannuation and Retirement Income Act 2001 (the Act) to partially provide for the future cost of New Zealand Superannuation. The Government currently allocates about $2 billion a year to the Fund.

The Fund is governed by a Crown entity, the Guardians of New Zealand Superannuation (the Guardians). The role of the Guardians is 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 Board of the Guardians (the Board) appoints external firms to carry out day-to-day portfolio management.

We carried out a performance audit of the Guardians’ governance and management of the Fund.

This Part explains:

  • why we did the audit;
  • the scope of the audit; and
  • how we conducted the audit.

Why we did the audit

The Fund is a major public investment. Since the Fund began in September 2003, it has grown rapidly to $13.7 billion of assets under management as at 30 June 2007. The Fund is expected to reach a value of $120 billion by 2027.

The objective of our performance audit was to provide independent assurance to Parliament on whether the Fund is being prudently governed and managed.

Section 71(3) of the Act requires the Guardians’ performance to be reviewed and reported to the Minister of Finance at intervals of not less than five years. While our performance audit was not specifically for that purpose, our report may assist the Guardians to meet those review requirements.

Scope of our audit

Our performance audit assessed:

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

We covered areas of the Guardians’ operations, including:

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

We reviewed the processes used to select Investment Managers as stated in the Guardians’ June 2007 Investment Manager Selection Policy. We reviewed how Investment Managers were selected before the policy was put in place and confirmed that the process followed was largely consistent with the policy.

We also looked for areas where the Guardians could improve. Our report makes 24 recommendations.

Out of scope

We did not assess the performance of the Fund in terms of investment returns or the appropriateness of investments made for the Fund.

While we reviewed how investment transactions are initiated and settled, we did not specifically test samples of transactions to validate that processes are consistently applied.

We did not review the selection process for each Investment Manager. However, we did review how the performance of Investment Managers is monitored and assessed.

While recognising that the role of the Custodian is critical for effective transaction management and investment mandate compliance processes, we did not review specific management procedures to validate compliance with the service level agreement between the Custodian and the Guardians. This was partly because of the short-term nature of our performance audit (some procedures occur only annually) and also because the Guardians were still negotiating reporting requirements with their new Custodian at the time of our performance audit.

How we conducted our audit

Because of the highly specialised nature of the Fund, the Auditor-General appointed Ernst & Young under section 33(1) of the Public Audit Act 2001 to assist with our performance audit.

We reviewed documents and assessed the adequacy of the Guardians’ processes and activities. In particular, we compared the Guardians’ governance charters and major policies against relevant best practice standards issued by regulators, such as the:

  • Financial Reporting Council of the United Kingdom;
  • Monetary Authority of Singapore; and
  • New Zealand Securities Commission.

We also reviewed formal papers submitted to the Board, and reports produced by external advisors appointed by the Guardians.

We interviewed the:

  • Chairman of the Board;
  • Chairman of the Audit and Risk Committee;
  • Chief Executive Officer; and
  • staff of the Guardians.

We also benchmarked the processes and practices of the Guardians by:

  • comparing them to those applied by similar organisations in New Zealand and overseas where it was appropriate to do so;
  • using the various databases and resources of Ernst & Young, including its specialist financial services assessments; and
  • considering accepted industry good practice frameworks.
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