The outgoing chief of New Zealand's state pension fund has presided over a comprehensive reshaping of the institution's operations, while looking to address some major global issues and tricky local misperceptions.
As reported earlier in December, after 10 years at the helm of New Zealand Superannuation Fund, Adrian Orr is leaving to become governor of the country's central bank in March 2018.
Interviewed by AsianInvestor this week, the winner of the 2017 AsianInvestor 'Individual Contribution to Institutional Investment' Award reflected on his time at the NZ$37 billion ($26 billion) fund and the lessons he has drawn from the experience.
“When I started [in 2007] we had a very lean team with fewer than 20 staff, and we were heavily reliant on external managers," he told AsianInvestor.
The new management team wanted to better understand risk and return drivers and to have more control over the fund’s investments, said Orr. Setting up an in-house treasury function was "a major milestone that we needed to put in place before we could really get traction on the investment side".
Then started a steady expansion of the in-house investment team, which now totals around 130 staff, allowing the fund to have much more control over a wider range of assets.
This coincided with its move away from a traditional strategic asset allocation to a reference portfolio approach in 2009.
“That was a defining shift,” said Orr. “It is the foundation of our collaborative, opportunistic and contrarian investment style. Before we invest outside the low-cost, listed, passive reference portfolio, we need to be confident that we’ll get a better risk-adjusted return."
NZ Super Fund was set up in 2003 as a way for the Government to plan for future public pension payments, smoothing the cost between today’s taxpayers and future generations.
The country's new Labour-led coalition government has just confirmed (on December 14) it will recommence making capital contributions to the fund, with the previous National (Conservative) government having suspended contributions in 2009.
The NZ government now plans to put NZ$7.7 billion into the fund until June 2022, with the first payment made last Friday (December 15).
Orr is seen as a global champion of environmental, social and governance (ESG) investing principles and was behind NZ Super’s strong push into carbon-neutral strategies. The fund is now seen as a world leader in ESG, but it was an inauspicious beginning.
“In my first day on the job, I started on the back foot with a responsible investment issue in the domestic media [related to NZ Super's holding of tobacco-related stocks].” The issue was resolved soon afterwards when the fund announced it would divest such shares.
Climate change concerns
Given the change in 10 years, such a controversy is unthinkable now. ESG is the very bedrock of NZ Super's investment philosophy and Orr singles out climate change investment risk as “the issue of our time”.
NZ Super this month signed up to the One Planet Sovereign Wealth Fund Working Group, in order to accelerate efforts among SWFs to integrate financial risks and opportunities relating to climate change.
More widely, Orr has pushed hard for global sovereign funds to practice good governance and transparency and to use their influence and capital for positive ends. His roles as chairman of the International Federation of Sovereign Wealth Funds and of the Pacific Pension Institute have been instrumental in such efforts.
“Commercial independence from government is vital to long-term stability and success,” noted Orr.
Government influence is never far away, however, and NZ Super has often been used as a political football. While the fund's repuation has grown internationally, domestic support has been hard-won.
Orr faced down a high-profile backlash when he received a 23% pay rise in February 2017, taking his taxable income past to NZ$1.03 million. Then prime minister Bill English tried unsuccessfully to scupper the payment.
Orr would not be drawn on the issue of compensation packages for key executives, except to say that “the demands for information, engagement and transparency will continue to intensify”.
There had been misperceptions among the public at the time when Orr took over as CEO such as that NZ Super was playing with people's retirement savings when in fact it is a pension reserve fund. There is also a populist view that all of the fund's assets should be invested domestically, despite the fact that this could potentially raise concentration risk and limit potential returns.
As the capital contributions tap is turned back on this month, what positive effect does Orr think will result from this? “It will be good for morale and I expect for recruitment too. Throughout the contributions suspension, we have retained a focus on scalability, so the resumption is straightforward.”
The new money will be invested in the fund’s passive reference portfolio, with new active investments being taken up as attractive opportunities arise.
Orr added: “At its peak in the 2070s, the fund will be covering 12.8% of the country’s universal pension bill, with projected NZ tax paid by the fund equating to a further 8.5% of the pension cost.”
Ultimately, he pointed to the fund's strong investment returns over an extended period as a big contributor to its winning public support. It has returned 10.5% per year since its inception in 2003 and a particularly impressive 16.2% over the last five years.
The board accepts expectations should be tempered for the coming years. It has recently stated that while it remains confident that the fund will deliver value over the long term, “more normal returns (7%-8% per year) are expected in future”.