Global consultancy firm Willis Towers Watson (WTW) has won the job of reviewing the NZ Superannuation Fund (NZS) following a short tender process last December.
WTW was appointed last week to run the latest statutory five-yearly review – the fourth for NZS – with a final report due by the middle or this year.
Treasury has, so far, used a different firm each time for the NZS review starting with Auckland-based actuarial consulting business Eriksen and Associates for the inaugural 2004 report. (NZS launched in 2001.) Mercer picked up the gig for the 2009 review while US-based Promontory Group secured the 2014 tender.
“The purpose of the statutory review is to assess how effectively and efficiently the Guardians are performing their legislated functions, and to provide an independent assessment of the performance of the Guardians, and the Fund,” Treasury says in the tender document issued last year.
According to the review terms of reference, the latest review will focus on ex ante risk frameworks, investment performance, ethical investment and governance.
Generally, the previous NZS reviews have been favourable with minor recommendations – some of which have been adopted.
For example, the Eriksen 2004 review recommended the fund “increase the benchmark weighting in alternative assets and decrease the weighting in international equities”. While NZS did up its allocation to alternatives, global shares remains the go-to asset class, representing about 65 per cent of the entire $40 billion or so portfolio.
The 2009 Mercer report laid out a slew of improvements – including bolstering environmental, social and governance (ESG) practices – most of which the NZS accepted. However, the Guardians did baulk at Mercer’s suggestion to set the fund’s benchmark as “an actual investment rate of return or risk target”.
NZS has two performance benchmarks: the 90-day Treasury bills index plus 2.5 per cent; and, a passive reference portfolio .
“… setting a return benchmark at some margin over the risk free rate risks creating an incentive to load up on risky assets in order to achieve that benchmark, regardless of the pricing of such assets,” the NZS says in its 2009 reply to the Mercer review.
Similarly, the Promontory Group review largely focused on technical tidy-ups such as risk reporting and staff bonus structures. Promontory also called for NZS to create new head of risk and head of compliance roles (which it subsequently did).
However, the NZS knocked back the Promontory suggestion to standardise a definition of ‘material breach’ for all third-party managers.
Promontory also recommended NZS “consolidate the changes that have been made in the past few years and put a temporary pause on any further major changes, either in investment approach or organisational structure, until such time as all previous changes have been absorbed across the entire organisation”.
While the NZS agreed with the 2014 proposal, it replied “that the concept of best-practice, to which we aspire, is not a static one and requires ongoing innovation”.
The upcoming review will be the first under NZ Super CEO, Matt Whineray, who succeeded Adrian Orr in the role last June.