At a time when corporate executive pay is under particularly close scrutiny, criticism has been levelled at one of the most respected institutional investors in Asia Pacific for this and other reasons.
The future of New Zealand Superannuation Fund has been questioned after widespread negative publicity about its returns, the nature of some of its investments and the chief executive’s recent pay rise.
NZSF’s performance record has been criticised by local commentators, with chief executive Adrian Orr forced to defend the NZ$33 billion ($21 billion) fund against what he called “common myths”.
He received a 23% rise in total annual remuneration in February, taking his taxable income past NZ$1 million. Prime Minister Bill English had advised against the increase for Orr and said the decision by NZSF’s board to award the increase would not be taken lightly when it came to the reappointment of board members.
The board’s chairwoman, Catherine Savage, defended Orr’s pay rise, saying in a statement that it was “fair, competitive and appropriate given the nature and complexity of the role".
The criticism comes at a time when the fund’s status as a sovereign investor is being questioned, including suggestions it would be better managed as a passive fund, that it missed the investment good times after the 2008 global financial crisis and the country would be better off using the fund’s assets to pay down the government’s NZ$33 billion of debt.
Issuing a statement on Tuesday, Orr said these suggestions were inaccurate and reflected a widespread misperception of NZSF.
It is not unusual for so-called sovereign funds to face criticism at home, including suggestions that taxpayer funds should be used for other means. But NZSF has had a fairly easy ride in recent years under Orr’s guidance.
But now, in an election year and with superannuation and retirement savings high on the agenda, the fund is facing a backlash.
In a personal blog, Michael Reddell, a former head of financial markets at the Reserve Bank of New Zealand and former director of alternative investments at the International Monetary Fund, echoed the views of many in New Zealand who think NZSF’s assets should be deployed at home.
As a commercial operation, he suggested the fund should be evaluated on the same basis that the government uses for other investment projects. “NZSF has been getting paid for taking (a lot of) risk, and at what many would think of as near the peak of an asset price boom,” wrote Reddell.
But Orr countered that recent public comments show that many people don’t understand what NZSF is, what it does and the role of the Treasury.
The government’s wealth would not be improved, he argued, “if we had either paid down government debt or managed the fund passively. NZSF has generated investment returns at more than twice the cost of government debt servicing (pre-tax returns of 10.04% per annum since its inception in 2004, compared to the interest on treasury bills of 4.29% per annum).
“This amounts to NZ$17.3 billion made in excess of government debt,” Orr added. “That NZ$17.3 billion includes NZ$5 billion the fund has already paid [in tax].”
As for the suggestion that NZSF would be better managed passively, he said the mix of active and passive approaches adopted had significantly outperformed a simple passive equivalent (represented by the fund’s reference portfolio) by NZ$5.5 billion over the fund’s 13-year life, and did so by getting more return per unit of risk than the passive alternative.
NZSF has won global recognition for investment performance, transparency and responsible investing, including winning AsianInvestor’s award for environment, social and governance (ESG) investing for the past two years.
Its estimated long-term annual return is between 7% and 8%, a return in excess of the cost of government debt. Moreover, last year the fund said it would be applying a climate change impact overlay to its entire investment process.
Yet this hasn’t been enough to keep the critics at bay. NZSF has also been attacked by local politicians for some of its overseas investments. In March, the Green Party called on the fund to cut ties with Wilmar International, a Singapore-based palm oil producer subject to claims of worker abuse at its Indonesian operation. NZSF had invested $2,395,662 in Wilmar as of the end of February.
Meanwhile, environmental groups, including Greenpeace and Oxfam, are pressuring NZSF to divest entirely from fossil fuels. And while the fund last month said it would sell off some of its fossil fuel-linked investments, Orr said the fund preferred to engage with some companies in order to influence their behaviour.