The New Zealand Superannuation Fund (NZS) “stands out among global peers”, according to WTW, but should consider insourcing its private markets investments and establishing an overseas presence to improve access to deals and talent.
Under the review, carried out by WTW, the NZS achieved “excellent” ratings across its business, governance, people and investment models, and a “very good” rating for its systems model – putting the fund “into a small group of leading asset owners globally”.
“The policies and practices praised by WTW are the product of a focus on continuous improvement that dates back to the Guardians’ very early days,” said NZS chair John Williamson.
Improvements included a more conservative approach to liquidity management, changes to the risk budgeting process and a shift from responsible investment to sustainable finance practices.
But the WTW review recommends that the NZS mature the insourcing of private market investments and consider establishing an overseas presence – London, for example – in order to improve access to talent, GP and peer relationships and deals.
In its response, the NZS said that it would look for ways to enhance how it resourced insourced investment in private markets, but said that while it would keep a potential overseas office “under consideration”, it had no immediate plans to establish an overseas presence.
WTW also suggested that the Fund develop greater integration of systemic risk into the design of its total portfolio approach (TPA) through the use of “horizon scanning, (and) models that include left-tail risk measurement and management” as well as making sure that the reference portfolio is joined up with the fund’s investment approach.
And while the NZS has a “strong edge” in organisational culture, it got pinged for how it was handling organisational complexity – a bugbear for big asset owners generally, but one that’s also a hallmark of TPA – with WTW recommending that it “develop a set of complexity principles and strategies” and address certain organisational imbalances that have developed from increasing complexity”.
WTW said that the NZS should also review its success planning practices to respond to “continuity challenges” – referencing the recent departure of CEO Matt Whineray and CIO Stephen Gilmore.
Jo Townsend, NZS chief, said in a release: “While it is of course very satisfying to have the [NZS] Guardians rated so highly by an independent reviewer, the report’s value to us lies in the recommendations and suggestions for how we can best meet the challenges ahead.
“How best to consider impact when we assess potential investments, how to maintain our culture as the organisation scales up, and mitigating the many systemic risks facing all investors are just some of the issues we will need to manage if we are to maintain and improve upon our record to date… WTW’s guidance will be very much front of mind as we consider how best to scale up and invest the Fund in years ahead.”
In its previous review, WTW recommended that NZS review its compensation framework, use a risk factor framework to help identify diversification opportunities, and allocate more resources to responsible investment issues, while suggesting the board get more external advice on issues that are “highly complex or contentious”.
New Zealand Treasury projects that within 20 years the NZS will be worth more than $200 billion, and paying out $1 billion a year to help fund the universal state pension, along with circa $4 billion in tax annually, while continuing to grow in size. Payments from the fund are set to commence in 2033.
Lachlan Maddock is editor Investor Strategy News (Australia)