Part 6: Monitoring and reporting of Fund performance

Guardians of New Zealand Superannuation: Governance and management of the New Zealand Superannuation Fund.
Key messages
  • The Custodian provides high quality information from which a wide range of reporting can be prepared in a timely manner.
  • The reporting infrastructure and effective controls help to ensure that high quality and accurate information is reported to stakeholders.
  • From a cost perspective the Fund is well managed, with adequate justification for expenditure. There is an opportunity to improve cost management and accountability by allocating operating costs back to individual asset classes.

6.1
In this Part, we discuss the Guardians' monitoring and reporting of Fund performance. We summarise our main findings and set out our findings in relation to:

  • the Guardians' system for reporting Fund performance;
  • reporting of measures to manage major risks;
  • overseeing by the Board and the Minister; and
  • benchmarking of performance.

Our findings

6.2
Monitoring and reporting of performance is a critical aspect of any investment process. It allows timely and accurate information to be provided to stakeholders of the outcomes of the investment strategy.

6.3
The Custodian plays a vital role in reporting the investment performance of the Fund. The Custodian manages the systems and business processes that allow the Fund to process investment transactions and monitor Fund performance.

6.4
The Guardians use the following methods to monitor and report performance of the Fund:

  • self-monitoring and reporting requirements set out in each Investment Manager's service level agreement;
  • primary compliance monitoring processes conducted by the Custodian, and management through the Guardians' service level agreement with the Custodian;
  • secondary compliance monitoring performed by the Guardians' Investment Operations team;
  • two-weekly Strategic Asset Allocation compliance monitoring performed by the Portfolio Committee;
  • monthly reporting of Investment Manager performance and attribution analysis by the Custodian;
  • monthly reporting of performance to the Board and quarterly reporting of performance to the Minister; and
  • monthly and annual reporting by Investment Managers as required by the investment management agreements.

6.5
Also, the Guardians' Investment Operations team performs ongoing monitoring of the investments. The information is generated from a data warehouse (see paragraph 4.49), based on data provided by the Custodian. The Guardians' Policy team also performs some sensitivity analysis to forecast the effect of market changes on the existing portfolio.

System for reporting Fund performance

6.6
The Guardians report Fund performance:

  • cumulatively, since inception;
  • annually (generally to coincide with the Fund's accounting period);and
  • monthly.

6.7
The frequency of reporting is linked to who is using the reports and the intended purpose of the report. In our view, the coverage, scope, and frequency of reports are appropriate for the Fund.

6.8
Assurance over the accuracy of performance information used by the Guardians is derived in four ways:

  • The Custodian provides performance reports to the Investment Managers who then check the information against their own data. There is an escalation process back to the Guardians where material unresolved differences arise between the Investment Manager and the Custodian. This provides assurance on reported performance as Custodian data is cross-checked to independent Investment Manager data.
  • Under the Custodian's service level agreement, there are extensive reporting requirements to the Guardians about the accuracy, completeness, and recoverability of data. The Custodian undertakes disaster recovery exercises for its multiple sites to provide assurance that they can be relied upon.
  • An independent review is carried out of the performance system used by the Custodian.
  • The Guardians perform some consistency checks on the performance results reported by the Custodian by checking portfolio movements relative to benchmarks.

6.9
Reporting capability was one of the important considerations in the Guardians' appointment of a new Custodian. We examined the detailed level of analysis in reporting provided by the new Custodian.

Use of reporting information

6.10
At the time of our performance audit, the Guardians were still developing reporting requirements with the new Custodian.1 Although we did not specifically review the transition project in detail, it did appear to be a well-managed project with relatively few issues arising.

6.11
Given the timing of our performance audit, it would have been unreasonable for us to expect the Guardians to have fully determined their information requirements for the new Custodian and how the information was to be used.

Aggregation of information

6.12
All asset information relating to Investment Managers and asset classes are aggregated by the Custodian and forms part of the periodic reporting under the service level agreement between the Guardians and the Custodian.

6.13
There are a number of data validation checks performed by Investment Managers and the Guardians that provide reasonable assurance over the accuracy of reported investment data. These checks are performed above and beyond the data checks that the Custodian is required to perform under the service level agreement.

6.14
The Guardians report against their Statement of Intent in the annual report, and are continuously refining the objectives and measures that form the basis of this reporting.

Reporting of measures to manage major risks

6.15
The Guardians are yet to review monitoring of investment information against their recently approved Risk Management Framework (see paragraphs 3.24-3.33). However, we reviewed the information reported to the Guardians, and concluded that typical transaction processing risks are recorded and monitored:

  • The Guardians' service level agreement with the Custodian focuses on major investment transaction processing risks, such as trading cut-off, asset valuation, asset classification, and performance attribution analysis.2
  • The use of independent benchmarks applied to Investment Manager portfolios allows independent objective analysis.
  • The high degree of focus applied by the Guardians to Private Markets assets recognises the increasing issues of information reliability that come with investments not subject to regulatory disclosure requirements.

6.16
In our review of Investment Manager public market investment mandates, we noted that the scope of the investment mandates allows the Investment Manager to invest in unlisted securities. The purpose of holding such securities is to allow the Investment Manager to take advantage of entities expected to list on a public stock exchange.

6.17
In these instances, the Guardians continue to treat such investments as publicly traded securities for their Strategic Asset Allocation analysis. Typically, this would distort the true nature of the securities held in the portfolio as some securities would not be publicly traded. In making this observation we also note that:

  • the total value of such securities cannot ever be material because of the limits allowed within the respective investment mandates and therefore also the Fund;
  • the unlisted securities are subject to strict rules relating to timeframe to list;
  • these rules are closely monitored by the Custodian as part of the overall investment mandate compliance process; and
  • the Strategic Asset Allocation does not distinguish between listed and unlisted entities.

6.18
If the Guardians do not apply clear definitions of asset categories, the assessment of portfolio compliance relative to the Strategic Asset Allocation will be incorrect. If this difference was material, it could lead to an incorrect assessment of investment risk. All public investment mandates that we reviewed limited this risk by restricting the amount of private securities and the period of time that the investments could remain private.

Recommendation 15
We recommend that the Guardians of New Zealand Superannuation 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.

Oversight by the Board and the Minister

6.19
The Board receives and reviews monthly performance reports from management. Fund financial performance is also reported monthly to the Treasury. The Guardians, the Custodian, and Investment Managers use several methods to validate reported data. In our view, these validation checks and controls are appropriate.

6.20
The Guardians perform detailed checking and validation procedures before information is released to the Office of the Minister of Finance. The Custodian prepares the Performance Report and the Investment Operations team reviews the report.

6.21
The Guardians' internal auditor has reviewed the performance reporting processes performed by the previous Custodian. As agreed in the service level agreement with the new Custodian, the Guardians' internal auditor will also review performance processes and reporting once the reporting arrangements are agreed and delivered. In our view, these controls are adequate and should ensure that reporting is accurate.

Performance benchmarking

6.22
Apart from investment performance monitoring and benchmarking, the Guardians also compare their cost-effectiveness to that of peer organisations. This benchmarking is performed annually by a North American-based organisation specialising in the funds management and superannuation sectors. The benchmarking information is used to assess the cost-effectiveness of the Guardians' operations and was a catalyst for changing the Custodian, introducing remuneration programmes, and reorganising internal costs.

6.23
Our review of the analysis of international benchmarks of cost-effectiveness found that some aspects of the Guardians' costs are higher than peers in the benchmark survey. This is a result of:

  • the Fund holding a large number of small Investment Manager investment mandates;
  • significant costs for an external Custodian;3
  • the need to invest in the development of internal control infrastructure and supervision to accommodate the Fund's rapid growth;
  • costs associated with the Crown's requirements such as responsible investment activities; and
  • investment advisory fees associated with development and assessment of the Strategic Asset Allocation.

Cost allocation

6.24
Recently, the Guardians reviewed central costs to get an objective basis for allocating costs between the Guardians and the Fund. There are opportunities to use this information further so that support costs can be fully allocated back to asset categories (or investment mandates). However, we note that Fund administration costs currently constitute a small portion of the total costs. The likely effect on the Fund's net reported returns is unlikely to be significant.

Recommendation 16
We recommend that the Guardians of New Zealand Superannuation 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.

Our conclusions

6.25
The Custodian provides high quality information from which a wide range of reporting can be prepared in a timely manner. The requirements placed on the Custodian and Investment Managers as well as procedures performed by the Guardians provide effective controls to ensure that reported information is accurate. The reporting infrastructure helps to ensure that high quality and accurate information is reported to stakeholders.

6.26
From a cost perspective, the Fund is well managed, with adequate justification for expenditure. There is an opportunity for the Guardians to improve management of costs by allocating operating costs back to individual asset classes. This will improve accountability of the expenditure of the Guardians by correlating activity with investment returns.


1: The new Custodian was appointed with effect from 1 July 2007.

2: Performance attribution analysis attempts to explain portfolio performance in terms of the active investment management decisions for "selection" and "allocation". It aims to determine which elements of the strategy, such as market timing or security selection, were responsible for the results and why.

3: The former Custodian attracted higher costs, and the total costs were higher in 2007 because of the transition to a new Custodian.

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