Pension suffers a NZ$2.6m loss in 2008

October 2009 Issue

 

A substantial loss in investment income has forced a major overhaul at the Cook Islands National Superannuation Fund (CINSF).
Amid negative media reports locally, CINSF announced the overhaul last month, a necessary step it said it had to take in light of the NZ$2.6 million loss in investment income it suffered during its 2008 financial year.
“The annual reporting to the fund’s members is seriously in arrears for the 2008 year and was similarly so in 2007.
"This inability by the fund’s service providers to enable it to meet its obligations to its members has prompted the undertaking of a total review of the fund, its operations and policies,” CINSF said in a statement.
“Under a New Zealand aid funded grant the New Zealand accounting and consulting firm of Ernst & Young has completed the review and the draft report is currently being studied by the fund’s management and board.
“The draft report contains many recommendations for improvement of policy and operations that the board will consider and approve for adoption and implementation.
While it had yet to announce further decisions on implementation when this edition went to press, CINSF revealed a major loss in investment income for 2008, equivalent to 10 percent of average capital invested for that year.
Financial data provided by the superannuation fund showed that it had not seen a negative return since 2002 and it blamed the fall on the global recession, which has hit hard on its mainly offshore invested portfolio.
“The fund recorded an investment loss in the 12 months to 31 December, 2008 of $2,028,074— approximately 10 percent of the average capital invested for that year.
"Whilst disappointed that a loss has occurred, the board is not surprised with this result as 2008 was the year that sparked the global recession that has continued to plague investment markets and portfolios worldwide,” CINSF said.
This investment loss, together with management, administration and insurance fees totalling $622,216, means that the total erosion of the investment is $2,650,289, which represents 13.1 percent of the average capital invested for the year,” the super fund added.
While CINSF had copped much flak locally after the poor results were leaked to local media, the fund argued it was not alone in reporting a disappointing year.
“Performance of similar funds is advised by Eriksen & Associates, Actuaries and Business Consultants, in their ‘Master Trust Survey Results to 31 December 2008’ as: “growth funds returned -25.4 percent, balanced funds returned -16.1 percent, while conservative funds returned -1.5 percent after tax, expenses and fees were deducted.

Recovery possible
But it’s not all bad news for a fund that has been returning positive numbers since 2003.
As a long-term investor with funds invested mainly in New Zealand and the international financial markets, there are expectations it would bounce back as the global markets recover.
In assessing the impact of the global financial crisis on the Pacific’s financial markets, the Asian Development Bank had said that shocks for funds such as CINSF were unavoidable.
“In countries that lack sufficient local investment opportunities, superannuation funds that are largely invested offshore, such as the Cooks Islands, Kiribati, Nauru and Tuvalu, would have substantially decreased in value through the effects of the financial crisis on their overseas stock holdings,” the ADB had forecasted in its policy brief titled Navigating the Global Storm, released late last year.
“Provided those superannuation funds with an offshore exposure have avoided investments in now-failed entities, the value of their investments should rebuild over time."
CINSF revealed a Statement of Investment Policy and Objectives (SIPO) that followed a conservative asset allocation strategy, where 35 percent of investments (growth assets) are held in New Zealand and international share markets, while 65 percent (income assets) are invested in New Zealand and international bond markets.
These investments, other than cash in the bank accounts and in transit, are currently invested in the Russell World Bond Fund (65 percent) and the Russell World Equity Strategies Fund (35 percent).
This, CINSF said, has helped it regain some lost grounds, at least in the first half of this year.
“During 2009 the fund has recovered significantly and achieved a gain of 10.93 percent with its investments in the Russell Funds from January to July.
"This is the nature of investment markets; superannuation is a long-term investment that invests in long-term investment vehicles to achieve the best return for our members,” it said.

Fund’s portfolio and performance
 
Illustration I
CINSF’s “Statement of Investment Policy and Objectives” (“SIPO”) recommends the following conservative asset allocation:
 
                                             Benchmark (%)              Range (%)
New Zealand Shares              5                                    3 – 7
International Shares               30                                  27 – 33

Total Growth Assets                35                                  30 – 40
 
New Zealand Fixed Interest    16                                  14 – 18
International Fixed Interest      24                                  22 – 26
Cash    25    Balance

Total Income Assets    65    60 - 70
 
• These investments, other than cash in bank accounts and in transit, are currently invested in: Russell World Bond Fund - 65%; Russell World Equity Strategies Fund- 35%

Illustration II
The historical performance of the CINSF is as follows:

Year    average capital invested    Return
2002     $491,532                          -0.8%
2003     $2,014,761                        8.5%
2004     $4,362,789                        8.2%
2005     $6,824,052                        9.7%
2006     $9,938,898                        9.0%
2007*    $14,513,857                     3.3%
2008*    $20,230,291                  -13.1%

• The years 2007 and 2008 were years that the fund assumed the cost of administration and insurance fees that were previously funded by the Government in its annual appropriation, together with the costs associated with the operation of the Fund’s office. These costs were $57,547 (2007) and $314,167 (2008).