Treasury has begun a review of the collective risk exposure of all Crown Financial Institutions (CFIs) as part of a government-wide review, according to a just-published ministerial ‘letter of expectation’ originally delivered to the New Zealand Superannuation Fund (NZS) this March.
In the letter, Finance Minister Bill English, says the government is increasingly concerned at its aggregate financial risk exposure “especially given the size and growth of financial assets on the Crown balance sheet”.
“The government needs to ensure that appropriate risk settings are in place across the Crown balance sheet,” the letter says. “I have tasked Treasury to work in this space and I ask that you engage with the Treasury when asked to support this work.”
In a similar letter sent to the ACC in April, Minister Nikki Kaye says the Treasury financial risk review is “at an early stage”.
Both Kaye and English urge their respective CFIs to focus on long-term returns, contain costs, closely manage use of derivatives and continue to collaborate with other CFIs “to achieve operational synergies and cost efficiencies through sharing of resources and intellectual capital”.
The letters also ask the ACC and NZS to “review major past investment decisions” to determine if the results matched expectation.
“The CFIs are increasing investment in non-listed investments and we think scrutiny by the owner for the larger investments is warranted,” the letters say.
English also called on the NZS to report back on “lessons from the Oak Finance investment” that resulted in the fund writing off a $200 million loan to the now-defunct Portuguese Banco Espirito Santo (BES).
In his letter of response, Adrian Orr, NZS chief, describes the BES loss as “unprecedented and unforseeable”
“We are pursuing legal action to rectify this situation in both England (firstly) and Portugal, and have been advised that we have a strong legal case. We are joined by the other seven investors who made up the full senior loan,” Orr says in the letter. “Our review also concluded that our investment policies and processes had been followed appropriately. We have concluded, however, that it would be useful to introduce some additional processes.”
Meanwhile, the NZS appointed Northern Trust to a passive global fixed income mandate last week.
According to a statement, the mandate will be managed to the Barclays Global Aggregate fixed income index, “incorporating [NZS’] environmental, social and governance (ESG) exclusions”.
“The appointment follows Northern Trust’s recent announcement that it had established an asset management sales and relationship management presence in Melbourne, Australia, in line with its strategy to service its clients as close to their home market as possible,” the release says.
In addition to the most recent mandate, Northern Trust runs four passive global equity portfolios on behalf of the NZS, the group also provides custody to the almost $30 billion fund.