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

Performance audits from 2008: Follow-up report.

The New Zealand Superannuation and Retirement Income Act 2001 created the New Zealand Superannuation Fund (the Fund) to contribute to the future cost of providing superannuation. This cost is expected to rise considerably in the next 20 to 50 years because of the ageing population. The Guardians of New Zealand Superannuation (the Guardians) are a Crown entity set up to invest the Fund in a way that is prudent and commercial, maximises return without undue risk, and avoids prejudice to New Zealand's reputation.

The scope of our audit

Our performance audit aimed to provide independent assurance to Parliament about whether the Guardians were prudently governing and managing the Fund.

We assessed the Guardians' governance and management of the Fund. In particular, we assessed how the Guardians performed in governing, managing, and administering the Fund, and the adequacy of the procedures the Guardians used to reduce risks arising from the rapid growth of the Fund.

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

Our audit did not consider questions about the appropriateness of government contributions to the Fund, or the appropriateness of having such a fund. These are matters of government policy and thus outside the authority of the Auditor-General. We also did not consider the adequacy of the Fund to meet future needs, or the performance of the Fund's investments.

Our findings

At the time of our audit, the Guardians were putting in place the types of internal control systems, processes, and procedures needed to manage and govern the Fund prudently.

The Guardians' internal controls generally met or exceeded international practice and guidelines for managing investment funds.

At the time of our audit, the Guardians had been operating for only five years. With this in mind, we considered that the achievements of its management and Board in developing often complex operational and governance infrastructure were considerable.

However, we found some areas where the Guardians could make improvements. Our report made 24 recommendations for improvement, five of which we considered high priority. The high-priority recommendations related to:

  • preparing a long-term operational strategy;
  • adopting a formal Board Charter;
  • updating the Guardians' risk management framework;
  • independently assessing the scope of the Board's current and future capability; and
  • putting in place a transparent process that the Guardians can follow if they are required to set remuneration for specialist skills outside the current approved levels.

The other recommendations for improvement covered areas such as governance, internal audit, risk management, due diligence, segregation of duties, human resources, information technology, and reporting.

The response to our findings and recommendations

As we conducted our performance audit in 2007, the Guardians were already taking our preliminary findings and recommendations into account as part of their strategic planning. At that time, the Guardians were in the early stages of a long-term role. They were working in a buoyant economic environment with regular and relatively large payments into the Fund expected for the foreseeable future. Our audit noted that the Guardians' internal control and governance processes had matured considerably since the organisation was created in 2001. However, we expected them to continually review their approaches as the organisation grows, and in response to the challenges of a constantly changing investment environment.

Since our audit, the national and international economic climates have changed significantly. With increased pressures on public finances, the Government has suspended automatic payments to the Fund until the Government's operating balance returns to a surplus. A payment of $250 million will be made in 2009/10, but any future contributions will be considered by the Government annually. This means that the Fund will not grow as quickly as was envisaged at the time of our audit and that the challenges facing the Guardians may have changed as a result.

The Guardians were quick to implement, or meet the intent of, our recommendations. When we contacted them in July 2009, the Guardians told us that they had completed action in response to three of the five high-priority recommendations:

  • In response to our recommendation that they should prepare a long-term operational strategy, the Guardians had put in place a three-year Strategic Plan.
  • The Board had adopted a formal Board Charter, which is available to the public on the Guardians' website. The Guardians carry out a periodic review of board and board member performance.
  • The Guardians' risk management framework continues to be refined to reflect the changing risk environment and business needs. Risk records are reviewed at least quarterly.

In response to our recommendation that the Guardians independently assess the Board's capability, the Guardians told us that they are working to build the Board's capability. The Board's capability-building includes Board visits to peer funds and annual reference days for board members to engage with international advisors on fund governance. The Board has also periodically brought in an independent governance expert to review its performance and capability.

The Guardians have been able to recruit staff with the necessary skills, and believe that their delegations provide enough flexibility to set appropriate remuneration levels for their staff. As a result, they have not put in place a process for setting remuneration for specialist skills outside the approved levels as we recommended in our report. We encourage the Guardians to keep this recommendation in mind and to implement it as soon as they feel it is necessary for them to be able to respond to market conditions.

Of the other 19 recommendations, the Guardians told us that they have completely implemented 15. As at April 2010, the Guardians were in the process of implementing the remaining four recommendations and anticipated soon completing them:

  • The two recommendations that relate to the Strategic Asset Allocation (SAA) were to be addressed during the fourth review of the SAA.
  • The Guardians have a project under way to address our recommendation to allocate administrative and operational costs to the respective investment classes for which those costs have been incurred.
  • In response to our recommendation to prepare policies on risk management, training and development, out-sourcing, and legal compliance, the Guardians were preparing policies on risk management and training and development. They were also completing the policies on outsourcing and legal compliance.

We are satisfied that the Guardians are committed to implementing these recommendations.

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Report details

Performance audits from 2008: Follow-up report

ISBN 978-0-478-32653-6