statement of performance expectations 2020-2021 · statement of performance expectations 2020-2021...

B.21

Statement of Performance ExpectationsNga- Matapae mo- Te Pu-rongo Whakahaere Pu-tea

For the period commencing 01 July 2020 to 30 June 2021

—

Guardians of New Zealand Superannuation

IntroductionHe Kupu Whakataki ...................................................... 01

01

How we measure our performanceTe huarahi e inea ai e mātou ā mātou mahi .............. 05

03

Statement of Estimated Fund PerformanceTe Tauākī e Whakatau Tata ana i te Tupu o te Tahua ............................................................. 09

05

Our ultimate goal (outcome) and strategic objectivesTā mātou whāinga mātāmua me ngā whāinga rautaki ............................................................ 04

02

What we intend to achieve in 2020/2021Ngā kaupapa e whai ana mātou ki te whakatutuki i te tau 2020 me te tau 2021 .................. 06

04

What are the key risks to the Fund’s performance in 2020/2021 and how are we managing them?He aha ngā tūraru matua ka pā pea kit e tupu o te Tahua I te tau 2020 me te tau 2021, ā, e pēwhea ana tā mātou noho takatū ki era? ..............10

06

Part 1: NZ Super Fund The ultimate goal (outcome)Te tino whāinga (te putanga) ........................................13

07

Part 2: Elevate NZ Venture Fund

Financial Projections for 2020/2021Ngā whakapae ā-pūtea mō te tau 2020 me te tau 2021 ...............................................................16

09

What we intend to achieve in 2020/2021 and how we will measure our performanceKo tā mātou e whai nei ki te whakatutuki i te tau 2020/2021 me te huarahi ka whāia hei ine i te whaihua o ā mātou mahi .......................... 14

08

Prospective Financial StatementsNgā pūrongo tahua e whakapaetia ana ......................17

10

Part 3: Financials

GUARDIANS OF NEW ZEALAND SUPERANNUATION

CONTENTS

STATEMENT OF PERFORMANCE EXPECTATIONS 2020-2021 01


Introduction

He Kupu Whakataki

The Guardians of New Zealand Superannuation is a Crownentity charged with managing the NZ Super Fund and theElevate NZ Venture Fund.

The NZ Super Fund is a global investment fund set up in 2001to partially pre-fund the future cost of New Zealandsuperannuation. By using the Fund to save now in order to payfor future retirement benefits, the Government aims to smooththe cost of New Zealand Superannuation between today’staxpayers and future generations.

In 2019, the Government established a venture capital fund,a second fund managed by the Guardians. The venture capitalfund, called the Elevate NZ Venture Fund, is a fund-of-fundsprogramme, managed on behalf of the Guardians by NewZealand Growth Capital Partners. At least $240 million of initialcontributions will be made available for investment, redirectedfrom the NZ Super Fund over the next four years, as well asadditional capital from New Zealand Growth Capital Partner'sexisting assets. Over time, the capital to be made available forinvestment is expected to reach up to $300 million.

Investing began in 2003. The Guardians invests the capitalcontributions made by the Government, as well as the netreturns generated from the investments made (less the taxpaid).

NZ SUPER FUND - SINCEINCEPTION (after costs,unaudited, as at 31 March 2020

Government Contributions $17.48 billion

Investment Returns $28.14 billion

NZ tax paid $(6.82) billion

Other movements $(0.7) billion

Fund size, as at 31 March2020

$38.73 billion

Our Statement of Performance Expectations outlines theactivities we will undertake in the financial year to 30 June 2021towards our long term objectives, and how we will measureour performance.

Our Statement also sets out:

• the Board’s expectations for the NZ Super Fund'sperformance over the 2020/21 financial year;

• the key risks to our performance and the actions beingtaken by the Board to manage those risks; and

• forecast operating costs to be incurred by the Elevate NZVenture Fund; and

• forecast financial statements for the 2020/21 financial yearfor both the Guardians and the NZ Super Fund. Forecastfinancial statements for the Elevate NZ Venture Fund are notrequired.

Each year we receive a Letter of Expectations from the Ministerof Finance outlining the Minister’s expectations of theGuardians’ activities for the forthcoming year. A number of theactivities referred to are multi-year activities that we undertakeas part of our business as usual work streams (such as ourongoing engagement and collaboration with Treasury andother Crown Financial Institutions). A copy of the Letter, alongwith the Guardians’ response, is available on our website(www.nzsuperfund.nz).


APRIL 2020

01Part 1:NZ Super Fund

STATEMENT OF PERFORMANCE EXPECTATIONS 2020-202102




Our ultimate goal (outcome) and strategic objectives

Tā mātou whāinga mātāmua me ngā whāinga rautaki

The Guardians’ output is to invest the NZ Super Fund on aprudent, commercial basis and, in doing so, manage andadminister it in a manner consistent with:

• best-practice portfolio management;

• maximising return without undue risk to the Fund as awhole; and

• avoiding prejudice to New Zealand’s reputation as aresponsible member of the world community.

The Guardians’ mission is to maximise the Fund’s return overthe long-term, without undue risk, so as to support thisoutcome.

Managing the Fund comprises five work streams covering:

• investment;

• risk management;

• cost control;

• governance; and

• organisational capability.

Our 2020-2025 Strategic Plan sets out our medium termstrategic objectives and the activities that we will undertake toachieve these objectives. More information on these objectivesand what success looks like for the Fund in the medium termcan be found in our 2020-2025 Statement of Intent (pages 7 -8).



Our strategic framework is outlined in our Statement of Intent2020-2025 (available on our website at www.nzsuperfund.nz)and is summarised below:



How we measure our performance

Te huarahi e inea ai e mātou ā mātou mahi

In line with this, over rolling 20 year periods, we expect the NZ Super Fund to achieve:

• the 90 day Treasury Bill Return

• + 2.8% p.a. in Reference Portfolio Returns

• + 1% p.a. value add in Actual Fund Returns

With only a 1% chance of delivering a return over 20 years worse than 1.7% p.a.

More information about the measures used to track our long term performance can be found in our Statement of Intent (pages10 - 12) and on our website. Our Statement of Intent (pages 12 - 15) also sets out how we measure success in delivering on eachof our five work programmes through which we manage the NZ Super Fund.

Those measures will be used to assess our performance in carrying out key activities we expect to achieve in 2020/21. Wherepossible we look to obtain assessment of our performance from independent third parties and global experts in benchmarking.

We report on the NZ Super Fund’s progress towards its long-term and short-term objectives in our Annual Reports, includingperformance against specific measures in the Statement of Performance.



What we intend to achieve in 2020/2021

Ngā kaupapa e whai ana mātou ki te whakatutuki i tetau 2020 me te tau 2021

In this Statement of Performance Expectations we describe thekey activities for the Guardians in respect of the NZ Super Fundin 2020/21. These activities relate to each of the five workprogrammes that support the objectives set out in ourStatement of Intent.

The performance measures for each of these workprogrammes are set out in the Statement of Intent. Ourexpectations for the Fund’s financial performance over the2020/21 financial year are covered later in this document.

We will report on our performance in implementing theseactivities in our 2020/21 Annual Report. We will provide an in-depth report against three of these activities: InfrastructureInvestment; Data Strategy; and the Human Resources sytem;in the Statement of Performance section of our 2020/21Annual Report.

Strategic Activity 2020/2021 Metrics Key Risks to Achievement Contribution toTarget States:Medium-term

Contribution toTarget States:Long-term

1.Infrastructure Investment (Investment)

Infrastructure has been identified asan attractive investment class for us,offering consistent returns and yieldand defensive characteristics. It isalso a key mechanism throughwhich we can continue to deliver onour Ministerial directive to activelyseek and consider New Zealandinvestments. The proposedAuckland light rail project hasprovided an obvious opportunity toextend our involvement ininfrastructure investment at scaleand build capability.

Relevant Strategic Objective(s): #1Best Portfolio

If the proposal by theGuardians and ourpartners, CDPQ Infra,(together NZ Infra) isselected as thepreferred deliverypartner, it will likelyrequire additionaldirect support as itbuilds capabilities andcapacity.

The Guardians Board,CEO and key functionswill have ongoing rolesto play on behalf ofthe Guardians as theproject develops, askey stakeholders in NZInfra.

Failure to fully appreciateproject resourceimplications on existingshort-term priorities andproposed 2020/21activities.

Disciplinedprogress toachievement ofFund purpose.

Appropriate risk-appetite for ourpurpose.

2. Sustain the Guardians’ Culture(Organisational capability)

1. Implement material actions fromthe risk culture survey.Implementation of the full riskculture work programme is a

Culture survey actionsidentified andimplementation planagreed.Implementation maybe multi-yeardepending on surveyoutcomes.

Failure to consistentlyexemplify outcomes inleadership actions andeveryday staffinteractions.

Culture andvalues stronglydefined andidentified with.

Single teamapproach with astrong,constructiveculture, in linewith our values.





continuation of the 2019/20activities.

2. Continue to embed andreinforce the new values.

3. Educate on the why; design andconduct the culture survey.

Relevant Strategic Objectives: #3Great Team and #1 Best Portfolio

3. Control EffectivenessAssessment (Risk Management, Governance)

Building on the Risk AssessmentFramework established in 2019/20,implement control effectivenessassessments and Key Risk Indicators(KRIs) for the Guardians' top risks.

Relevant Strategic Objective(s): #1Best Portfolio, #4 Efficiency &Innovation

Roll out controleffectiveness and KRIsfor three of the toprisks.

Capacity in businessteams to progress thisactivity.

Challenges in identifyingreliable evidence thatcontrols are operatingeffectively, and that eitherindividually or inconjunction with othermeasures, the controlsadequately manage therisks.

Selecting the right KRIsthat focus on key riskareas, and being able tosystematically andconsistently collectmeaningful data.

Best practicegovernance,enterprise riskand informationmanagement.

Appropriate risk-appetite for ourpurpose.

Leadership inbest practicegovernance andclear on riskmanagement.

4. Data Strategy(Investment, Cost Control)

Data concerns are regularlysurfaced in forums and discussions,pointing to an absence of a clearlycoordinated, articulated, andagreed data strategy. This makes itdifficult to be confident that we areappropriately identifying,prioritising, and addressing dataissues and opportunities.

A data strategy group has recentlybeen established withrepresentatives from across theGuardians. An over-arching datastrategy needs to be established toarticulate the Guardians dataaspirations and capabilityrequirements for the years ahead.This would include addressingtechnical debt requirements, dataanalytics and data managementcapabilities, and ensuring on-goingimprovements in data governancepractises.

Relevant Strategic Objective(s): #1Best Portfolio, #4 Efficiency &Innovation

Data strategyestablished andongoing operatingmodel agreed andresourced acrosstechnology,operational andinvestment teams todeliver and continueto evolve this strategy.

Data management workis typically complex andtime consuming. Thebiggest risk is that thebusiness does notproactively engage withdevelopment andprogression of the dataroadmap and governanceframeworks, resulting incontinued inefficienciesand missed opportunitiesto leverage quality data.

Better interfacesto access datain a self-servicemanner.

Address currentgaps in ourinformationsets.

Best practice datagovernance anddata architecture.

Strong supportand use by thewider business.





5. Human Resources System (Organisational Capability)

Research is underway into a suiteof digital solutions to streamline,integrate and transform HRprocesses and data to deliverefficiencies and scalability, andincrease the value of the workplaceexperience provided to employees,managers and leaders.

These solutions will support theintegrated Talent Lifecycleframework that has been builtthrough a 2019/20 StrategicActivity, and which will continue toevolve as a BAU workstream in2020/21.

Relevant Strategic Objective(s): #3Great Team, #4 Efficiency &Innovation

Investigation intopotential solutionsand implementationpartners is still at anearly stage, and thesedecisions willinfluence the scopeand timings for theproject; whether aphasedimplementation isappropriate; and theHR activities to besupported by thesystem by 30 June2021.

Underestimating thecomplexity of this project,including theinterconnectedness ofsystems and risks to bemanaged – increasingimplementation times /cost / risk of businessinterruption.

Frameworksand processesare scalable andflexible.

Embed ongoinginnovation andleveragetechnology.

Motivated staffwith Guardiansorganisational‘buy in’ achievedthroughdevelopment &talentprogrammes.

6. Responsible Investment (RI)Compass

The recent WillisTowersWatsonIndependent Review report ratedthe Guardians RI capabilities as “AA– an excellent rating”, while alsonoting several areas to continue toevolve our RI approach andthinking.

A refresh of the RI compass iscurrently underway to confirmwhere we want to be and how toget there. This will require inputfrom across the business and severaldiscussions with the IC and Board.

Depending on the outcomes of thereview of the RI compass, there maybe specific significant or strategicactivities that are picked up in FY2021/22 and beyond.

Relevant Strategic Objective(s): #1Best Portfolio

An InvestmentCommittee and Boardagreed RI compass andthe steps needed andtimeframe to executeidentified.

Business as usualdemands preventingsufficient resources frombeing applied to thislonger-term planninginitiative.

Activemembershipand leadershipof influentialglobal forums.

Integration ofESG intoinvestmentdecisions.

Best practice ESGand RI strategiesintegrated intoinvestmentprocesses.

ContinuingBoard Educationand leveragingof insights /experience.



Statement of Estimated Fund Performance

Te Tauākī e Whakatau Tata ana i te Tupu o te Tahua

Predicting short-term financial market returns with any usefulaccuracy over such a near-term horizon is impossible. Wetherefore show our long-term, or equilibrium, expectations forthe Reference Portfolio return (see our 2020-2025 Statementof Intent for more information about the Reference Portfolio).

To that we add our expectations of returns from value-addedactivities to arrive at the mid-point for the actual Fund. This isshown in the table below. We note that given the volatility ofreturns there is a range of possible return outcomes aroundthese estimates.



What are the key risks to the Fund’s performance in2020/2021 and how are we managing them?

He aha ngā tūraru matua ka pā pea kit e tupu o teTahua I te tau 2020 me te tau 2021, ā, e pēwhea ana tā

mātou noho takatū ki era?

Investment strategies are designed to improve the Sharpe ratio of the NZ SuperFund, that is to increase return without a commensurate increase in risk.

The Board has developed a risk-appetite statement outlining itsexpectations of the level of risk that is appropriate for the Fundto take on. This statement, along with our wider approach tomanaging risk, is set out in schedule 2 of the Guardians’ RiskManagement Policy and in our Statement of InvestmentPolicies, Standards and Procedures, available onwww.nzsuperfund.nz. Performance against this statement ismeasured and reported to the Board on a regular basis.

The Guardians has identified five major categories of risk withrespect to the NZ Super Fund:

1. Investment risk: The risks attached to investment goals andobjectives, including market, credit, counterparty, managerand liquidity risk;

2. Strategic risk: The risk that we make inappropriate strategicchoices or are unable to successfully implement selectedstrategies;

3. Legislative and regulatory risk: The risk of loss due tononcompliance with laws, rules and regulations andprescribed industry practice;

4. Operational risk: The risk of loss from inadequate or failedinternal processes, people and systems or from externalfactors;

5. Reputation risk: The risk of loss of reputation or credibilitysufficient to have a commercial or other practical impactdue to internal or external factors.

The Board and management of the Guardians are responsiblefor managing these risks. The Guardians’ risk-managementframework is reviewed and approved by the Board. The AuditCommittee reviews the reports of management, and of theGuardians’ external and internal auditors, on the effectivenessof systems for internal controls and financial reporting. The

Board delegates day-to-day management of risk to the ChiefExecutive Officer.

Inherent in this delegation is a desire to ensure that day-to-dayresponsibility for risk management is at the business unit level,where risk is seen as part of the overall business process, anda robust framework of identification, evaluation, monitoringand control exists.

More information on the Guardians’ risk management processcan be found in the risk management section of our AnnualReport. While each of the five categories of risk identifiedabove affect the performance of the Fund, further commenton key investment risks is set out below.

Market Risk: Market risk is the risk that the fair value of futurecash flows of financial instruments will fluctuate due tochanges in market variables such as equity prices, interestrates, foreign exchange rates and credit default swap spreads.

The market risks that the Fund is primarily exposed to are:

• Equity price risk, both globally and in New Zealand. Wemanage this through diversification between asset classesand by imposing investment constraints at a total Fund leveland within individual investment mandates.

• Foreign currency risk, primarily due to changes in the NewZealand dollar versus the United States dollar. This ismanaged by establishing a target hedge ratio for all foreigncurrency exposures at a total Fund level and by specifyingbounds within which external investment managers maytake on foreign currency exposures.

• Interest rate risk, primarily due to changes in New Zealandand United States interest rates. This is managed bydiversification between asset classes and by imposinginvestment constraints on external investment managers.



The NZ Super Fund is also exposed to market risk in respect ofits forestry activities due to the global volatility of log prices,exchange rates and transportation costs. These exposures aremanaged through adjustments to harvest levels and marketingefforts in order to minimise the risk of financial loss.

Additionally, the Fund is exposed to market risk in respect of itsfarming activities due to the global volatility of product pricesand the price of key inputs. Prices relative to key inputs arecontinually monitored so that operations can adapt as required.

Credit Risk: Credit risk is the risk that a third party will defaulton its obligation to the Guardians, causing the Fund to incura loss. The Fund is exposed to credit risk arising from its cashand cash equivalents, receivables and investments.

The Board and management mitigate the Fund’s exposure tocredit risk associated with our internally managed investmentsby applying specific prudential limits to any unhedged exposureto any single investment manager or asset. Investment strategyspecific constraints are also imposed to limit the Fund’s netunhedged exposure to individual counterparties and clearinghouses.

The credit risk associated with externally managed investmentsis managed by including specific prudential limits in ourinvestment management agreements which restrict the creditrisk the Fund is exposed to.

Manager Risk: External investment managers are monitoredindividually on an ongoing basis. We evaluate our managers intwo ways:

1. 'Conviction' - our confidence in the manager's competenceto execute an investment opportunity and the generalquality and 'fit' of the organisation. Key inputs include themanager's performance, their overall conduct and theextent to which they are meeting any knowledge transferexpectations that we have of them. The management ofESG factors is also a key element. Conviction reviews areundertaken at least annually.

2. Operational Due Diligence - the manager's regulatory,operational, organisational, and financial processes andprocedures. If a manager does not pass the operational duediligence review, we do not invest. Once invested, if wehave operational concerns, we act on them immediately(including termination if appropriate).

Counterparty Risk: The Board and management closely monitorthe creditworthiness of the Fund’s counterparties by reviewingcredit ratings, credit default swap spreads, equity pricing, newsflows and other indicators on a regular basis.

Liquidity Risk: Liquidity risk is the risk that the Fund willencounter difficulty in meeting the obligations associated withits financial liabilities as they fall due.

Our liquidity framework is designed to ensure that the Fund hasthe ability to generate sufficient cash in a timely manner tomeet its financial commitments.

Liquidity risk is managed by:

• forecasting liquidity requirements;

• maintaining a buffer of cash and highly liquid securities tomeet short-term liquidity requirements;

• regular reviews of the liquidity available by seniormanagement;

• periodic ‘stress tests’ of the liquidity framework usingtheoretical scenarios.

02Part 2:Elevate NZ Venture Fund





The ultimate goal (outcome)

Te tino whāinga (te putanga)

The outcome of the Elevate NZ Venture Fund is its contribution, over a 15 yeartimeframe, to a sustainable and productive New Zealand economy.

This is to be achieved through:

• Increased venture capital being available to New Zealandentities;

• More self-sustaining early stage capital markets; and

• Successful and sustainable New Zealand businesses.

The Guardians is responsible for managing and administeringthe Elevate NZ Venture Fund, according to the high level policydirections provided in the Policy Statement, and using best-practice investment management that is appropriate forinstitutional investment in those markets. Managing the fundin this manner is our output.

We deliver on this output by:

• Appointing New Zealand Growth Capital Partners as theexternal fund manager for the Elevate NZ Venture Fund;

• Ensuring the management agreement reflects best practicein the context of institutional investment in New Zealandventure capital markets;

• Ensuring that information reporting requirements relatingto the flow of capital are covered in the managementagreement;

• Monitoring and managing the performance of the externalfunds manager;

• Ensuring compliance with the Statement of InvestmentPolicies and Procedures.

Through 2019/2020 the Guardians worked with The Treasury,Ministry of Business Innovation and Employment and with NewZealand Growth Capital Partners to develop an effective andworkable legislative approach to establish the Elevate NZVenture Fund. We worked closely together on all of the policydetail to ensure that it was consistent with best practice in thecontext of New Zealand venture capital markets.

The appointment of New Zealand Growth Capital Partners asthe external funds manager was anticipated in the VentureCapital Act 2019. The Management Agreement negotiatedwith the external funds manager reflects best practice in thecontext of venture capital markets. As required in thelegislation, the agreement was reviewed by the Minister ofFinance before it was signed by both parties in February 2020.



What we intend to achieve in 2020/2021 and how wewill measure our performance

Ko tā mātou e whai nei ki te whakatutuki i te tau2020/2021 me te huarahi ka whāia hei ine i te whaihua

o ā mātou mahi

The Elevate NZ Venture Fund is a fund-of-funds programme, managed on behalf ofthe Guardians by New Zealand Growth Capital Partners.

It is the responsibility of New Zealand Growth Capital Partners to appoint private sector venture capital fund managers who willselect the entities to invest in. It is our responsibility to monitor New Zealand Growth Capital Partners performance in line with thebest practice approach we have developed to manage relationships with other local and international investment managers, asapplicable to the New Zealand venture capital market.

We use a conviction process to assess a manager’s competence to execute an investment opportunity on our behalf. We useeight factors of performance, reflecting our view that for a manager’s capabilities to be repeatable, they need to demonstrate:

• Viability – the manager is credible and stable as an organisation such that they can deliver on their strategy over time.

• Structure & Focus – the manager is appropriately focused on and aligned to the Guardians.

• Trust – we are confident that the manager will do what they say they will do, and always act in our interests.

• Risk Awareness & Management – the manager has robust systems and processes for identifying, assessing, managing andreporting investment and non-investment risks.

• People Capabilities – the manager’s team has the necessary competencies and depth to execute on the investment strategy.

• Process Capabilities – the manager has the necessary tools, systems, networks and processes to execute on the investmentstrategy.

• Opportunity Consistency – the manager can demonstrate that they understand our investment objective and how theirstrategy will deliver, and they consistently execute their strategy as we would expect and according to the risk-return profilein line with the opportunity.

• Performance – the manager has demonstrated performance in executing on the investment strategy.

Over 2020/2021 we will undertake a conviction review of the manager of New Zealand Growth Capital Partners and report backin the Statement of Performance section of our 2020/2021 Annual Report.

03Part 3:Financials





Financial Projections for 2020/2021

Ngā whakapae ā-pūtea mō te tau 2020 me te tau 2021

COST ALLOCATION

Costs are incurred directly by the Guardians and both of itsmandates, the NZ Super Fund and Elevate NZ Venture Fund.

The Guardians’ costs – with the exception of those incurred bythe Board – are met from the NZ Super Fund and Elevate NZVenture Fund and include remuneration, staff expenses suchas office services, travel, and professional development.

Certain expenses of the Board are met from Parliamentaryappropriation and are composed of Board fees, the cost oftravel to and from Board meetings and the cost of externalaudit for the Guardians.

Of those costs not met from appropriations, the Guardianscharges the Elevate NZ Venture Fund a flat rate fee, equatingto 18 basis points per annum of the planned $300mcommitment to that mandate. This amount will be revised ifcosts are consistently higher or lower than expected. All othercosts are recharged to the NZ Super Fund, resulting in theGuardians’ incurring a nil gain/loss each year.

All of these operating costs, irrespective of whether they aremet from appropriations or from the Guardians’ twomandates, are consolidated in the financial statements of theGuardians and subject to the reporting and disclosureobligations of the Crown Entities Act (2004).

NZ Super Fund costs are those incurred in the establishmentand implementation of investment policy and the financial andrisk management of that fund’s assets, including: fees paid toexternal managers and the master custodian; and the rechargepaid to the Guardians noted above.

Elevate NZ Venture Fund costs are primarily composed of:manager fees; fees paid to NZ Growth Capital Partners for theday-to-day management of the fund; and the recharge paid tothe Guardians.

We have prepared prospective financial statements for boththe Guardians and the NZ Super Fund. The NZ Super Fundestimates assume that earnings will be broadly in line with thelong-term estimate (i.e. 7.8% p.a. after costs but before NewZealand tax). Some costs are fixed (e.g. audit costs) and can beeasily estimated, but the majority are variable (i.e. base andperformance fees paid to investment managers or transactionfees paid to the custodian).

We have prepared estimates of these variable costs based onour expectations of the NZ Super Fund over the year.

No prospective financial statements are required to be preparedfor the Elevate NZ Venture Fund.

Costs incurred and charged to the Elevate NZ Venture Fund byNZ Growth Capital Partners in their day-to-day managementof that fund will be disclosed in their Statement of PerformanceExpectations.

EXPECTED TOTAL COST OF MANAGING THE NZ SUPERFUND 2020/2021

The forecast cost of managing the NZ Super Fund in 2020/21– excluding performance fees, is $153.3 million or 0.36% ofexpected average funds under management, compared to theforecast for 2019/20 of $136.6 million or 0.31%.

Of this amount the Guardians’ expenses are $75.0 million,amounting to 0.18% of expected average funds undermanagement.

Performance fees are only paid when investment managersoutperform their benchmarks and so they are better describedas an offset against returns than a cost. If we include forecastperformance fees, the total forecast cost of managing the NZSuper Fund in 2020/21 is $168.4 million or 0.40%, comparedto the forecast for 2019/20 of $166.3 million or 0.38%.

It is important to emphasise that these are forecast figures andthat actual fees will be dependent on investment performanceand the availability of suitable investment opportunities andaccess points.

Actual performance fees paid each financial year are disclosedin our Annual Report.

REPORTABLE OUTPUTS

The Guardians receives an annual appropriation to meet feesand expenses of its Board members and fees paid to itsexternal auditor. The appropriation for 2020/21 is$0.73 million.

All of the Guardians’ outputs are funded by payments from thefunds rather than from annual appropriations throughParliament.



Prospective Financial Statements

Ngā pūrongo tahua e whakapaetia ana

We have prepared prospective financial statements for theGuardians (in our role as manager and administrator of the NZSuper Fund and the Elevate NZ Venture Fund) and for the NZSuper Fund consistent with this Statement of PerformanceExpectations. Prospective financial statements are not requiredfor and have not been prepared for the Guardians othermandate, the Elevate NZ Venture Fund.

These prospective financial statements rely on assumptionswith respect to unknown or uncertain future events.Assumptions represent a risk in that actual events may varyfrom the assumption and that all of the outcomes that mayflow from actual events cannot be guaranteed.

These prospective financial statements should be read withinthe context of the 2020-25 Statement of Intent and thisStatement of Performance Expectations. Information in theseprospective financial statements may not be appropriate forpurposes other than those described.

The Board authorised the issue of these prospective financialstatements on 29 April 2020. The Board is responsible for theprospective financial statements presented, including theappropriateness of the assumptions underlying the prospectivefinancial statements and all other required disclosures.

The assumptions used in preparing the prospective financialstatements have been disclosed following the accountingpolicies of the Guardians and the NZ Super Fund. Actualfinancial results have not been incorporated into theprospective financial statements. The Board does not intend toupdate these prospective financial statements subsequent topresentation.


GUARDIANS OF NEW ZEALAND SUPERANNUATION AND GROUP


Prospective Consolidated Statement of ComprehensiveRevenue and Expense

FOR THE YEAR ENDING 30 JUNE 2021 NZD'000

Cost reimbursement from the New Zealand Superannuation Fund 74,137

Cost reimbursement from the Elevate NZ Venture Fund 500

Other revenue 160

Revenue from exchange transactions 74,797

Appropriations from the Crown 728

Revenue from non-exchange transactions 728

Total revenue 75,525

Board members' fees (404)

Employee entitlements (54,878)

Other expenses (20,243)

Total expenses (75,525)

Surplus/(Deficit) for the year -

Total comprehensive revenue and expense for the year -




Prospective Consolidated Statementof Financial Position

AS AT 30 JUNE 2021 NZD'000

ASSETS

Current assets

Cash and cash equivalents 685

Receivables from exchange transactions 13,571

Receivables from non-exchange transactions -

Non-current assets

Receivables from exchange transactions -

Property, plant and equipment -

Total assets 14,256

LIABILITIES

Current liabilities

Payables under exchange transactions (1,352)

Employee entitlements (11,113)

Deferred lease incentive (86)

Non-current liabilities

Employee entitlements (865)

Deferred lease incentive (340)

Total liabilities (13,756)

Net assets 500

PUBLIC EQUITY

Accumulated comprehensive revenue and expense -

General equity reserve 500

Total public equity 500




Prospective Consolidated Statement ofChanges in Public Equity

FOR THE YEAR ENDING 30 JUNE 2021

GENERAL EQUITYRESERVENZD'000

ACCUMULATEDCOMPREHENSIVE

REVENUE ANDEXPENSENZD'000

TOTALNZD'000

Balance at 30 June 2020 500 - 500

Total comprehensive revenue and expense for the year - - -

Balance at 30 June 2021 500 - 500




Prospective Consolidated Statement ofCash Flows


CASH FLOWS FROM OPERATING ACTIVITIES

Cash was provided from:

Receipts from the Crown 728

Receipts from the New Zealand Superannuation Fund 64,768

Receipts from the Elevate NZ Venture Fund 460

Interest received 60

Goods and Services Tax 25

Other receipts 67

Total cash inflow from operating activities 66,108

Cash was applied to:

Payments to Board members (404)

Payments to suppliers (20,352)

Payments to employees (48,287)

Total cash outflow from operating activities (69,043)

Net cash provided by/(used in) operating activities (2,935)

Net increase/(decrease) in cash and cash equivalents (2,935)

Cash and cash equivalents at the beginning of the financial year 3,620

Cash and cash equivalents at the end of the financial year 685




Summary of significant accounting policies

GENERAL INFORMATION

These are the prospective financial statements of the Guardiansof New Zealand Superannuation (Guardians) and itssubsidiaries (Group). The Guardians is a Crown entity as definedby the Crown Entities Act 2004. The Guardians is also a publicauthority in terms of the Income Tax Act 2007 and thereforeis exempt from income tax.

The Guardians is domiciled in New Zealand and the address ofits principal place of business is 21 Queen Street, Auckland.

The prospective financial statements of the Guardians of NewZealand Superannuation and Group for the year ending30 June 2021 were authorised for issue in accordance with aresolution of the Board of the Guardians of New ZealandSuperannuation on 29 April 2020.

STATEMENT OF COMPLIANCE

The prospective financial statements have been prepared inaccordance with the Crown Entities Act 2004 and the PublicFinance Act 1989 and comply with Public Benefit EntityFinancial Reporting Standard 42: Prospective FinancialStatements.

The Guardians is a public benefit entity, as the primary purposeis to manage and administer the New Zealand SuperannuationFund (NZ Super Fund) and the Elevate NZ Venture Fund (ElevateFund). The prospective financial statements have beenprepared in accordance with Generally Accepted AccountingPractice in New Zealand (NZ GAAP) as it applies to prospectivefinancial statements. They comply with Tier 1 Public BenefitEntity (PBE) Accounting Standards.

BASIS OF PREPARATION

The prospective financial statements have been prepared ona historical cost basis.

The prospective financial statements are presented in NewZealand dollars, which is the Guardians’ functional currency.All values are rounded to the nearest thousand dollars(NZD'000).

Accounting policies are selected and applied in a manner thatensures the resulting financial information satisfies theconcepts of relevance and reliability, thereby ensuring thesubstance of the underlying transactions or other events isreported.

The following particular accounting policies that materiallyaffect the preparation of the prospective financial statementshave been applied:

a) Basis of consolidation

The prospective consolidated financial statements comprise theprospective financial statements of the Guardians and itssubsidiaries as at 30 June 2021.

The prospective financial statements of subsidiaries areprepared for the same reporting period as the Guardians usingconsistent accounting policies. In preparing prospectiveconsolidated financial statements, all inter-entity transactions,balances, unrealised gains and losses are eliminated.

b) Subsidiaries

Subsidiaries are those entities that are controlled by theGuardians under the provisions of PBE IPSAS 35 ConsolidatedFinancial Statements. The Guardians controls an entity when itis exposed to, or has rights to, variable benefits from itsinvolvement with the entity and has the ability to affect thenature or amount of those benefits through its power over theentity. The Board and management reassess whether or not theGuardians controls an entity if facts and circumstances indicatethat there are changes to one or more of the elements ofcontrol.

c) Revenue

The Guardians primarily derives revenue through the provisionof services to the Crown, the NZ Super Fund and the ElevateFund. Revenue is recognised when it is probable that economicbenefits will flow to the Guardians and the revenue can bereliably measured. The following specific recognition criteriamust also be met before revenue is recognised:

REVENUE FROM EXCHANGE TRANSACTIONS

Exchange transactions are transactions in which one entityreceives assets or services, or has liabilities extinguished, anddirectly gives approximately equal value (primarily in the formof cash, goods, services, or use of assets) to another entity inexchange.

Rendering of services

Cost reimbursement from the NZ Super Fund and the ElevateFund is recognised by reference to the stage of completion ofservices provided at balance date when the transactioninvolving the rendering of services can be reliably estimated.The stage of completion is measured by the proportion of costsincurred to date compared with estimated total costs of thetransaction.

Interest income

Interest income is recognised as the interest accrues, using theeffective interest method. The effective interest methodallocates interest at a constant rate of return over the expectedlife of the financial instrument based on the estimated futurecash flows.

REVENUE FROM NON-EXCHANGE TRANSACTIONS

Non-exchange transactions are transactions that are notexchange transactions. In a non-exchange transaction, anentity either receives value from another entity without directlygiving approximately equal value in exchange, or gives value




to another entity without directly receiving approximately equalvalue in exchange.

Appropriations from the Crown

Revenue is recognised from the Crown when it is probable thatappropriations will be received, the value of thoseappropriations can be reliably measured and the transfer is freefrom conditions that require the asset to be refunded orreturned to the Crown if the conditions are not fulfilled. To theextent there is a related condition attached to theappropriations that would give rise to a liability to repay theappropriate amount, deferred revenue is recognised instead ofrevenue. In such situations, revenue is then recognised as theconditions are satisfied.

d) Operating leases

The determination of whether an arrangement is (or contains)a lease is based on the substance of the arrangement at theinception of the lease. The arrangement is (or contains) a leaseif fulfilment of the arrangement is dependent on the use of aspecific asset or assets and the arrangement conveys a right touse the asset. Leases in which the lessor retains substantially allthe risks and benefits of ownership of an asset are classified asoperating leases. Operating lease expenses are recognised ona straight-line basis over the period of the lease.

e) Foreign currency translation

Transactions denominated in foreign currencies are convertedto New Zealand dollars using the exchange rates prevailing atthe dates of the transactions. Foreign currency monetary assetsand liabilities are translated at the exchange rate prevailing atbalance date. Where there is a movement in the exchange ratebetween the date of a foreign currency transaction and balancedate, the resulting exchange differences are recognised in theProspective Consolidated Statement of ComprehensiveRevenue and Expense.

f) Financial instruments

A financial instrument is any contract that gives rise to afinancial asset of one entity and a financial liability or equityinstrument of another entity.

The Group is party to financial instruments as part of its normaloperations. These financial instruments include cash and cashequivalents, receivables and payables. All financial instrumentsare recognised in the Prospective Consolidated Statement ofFinancial Position and all revenues and expenses in relation tofinancial instruments are recognised in the ProspectiveConsolidated Statement of Comprehensive Revenue andExpense.

INITIAL RECOGNITION

Financial assets and financial liabilities are recognised in theProspective Consolidated Statement of Financial Position whenthe Group becomes a party to the contractual provisions of thefinancial instrument. They are initially recognised at fair valueplus transaction costs.

The classification of financial instruments at initial recognitiondepends on the Group’s business model for managing thefinancial assets and the financial asset’s contractual cash flowcharacteristics. In making an assessment of the business modelfor managing a financial asset, the Board and managementconsider all relevant information.

SUBSEQUENT MEASUREMENT

The Group’s financial assets and financial liabilities aresubsequently classified into the following categories:

Financial assets at amortised cost

The Group’s financial assets are classified at amortised cost ifboth of the following criteria are met:

• The financial asset is held within a business model whoseobjective is to hold financial assets in order to collect thecontractual cash flows; and

• The contractual terms of the financial asset give rise to cashflows that are solely payments of principal and interest.

This category includes cash and cash equivalents andreceivables.

Subsequent to initial recognition, financial assets at amortisedcost are measured at amortised cost using the effective interestmethod and are subject to impairment. When a financial assetis impaired, impairment losses are recognised in the ProspectiveConsolidated Statement of Comprehensive Revenue andExpense in the period in which they arise.

The Group’s financial assets are reclassified when, and onlywhen, the business model for managing those financial assetschanges.

Financial liabilities at amortised cost

Financial liabilities at amortised cost are non-derivative financialliabilities. This category includes trade payables and accruedexpenses. Subsequent to initial recognition, these financialliabilities are measured at amortised cost using the effectiveinterest method.

DERECOGNITION

Financial assets are derecognised when the rights to receivecash flows from the assets have expired or when the Group hastransferred substantially all of the risks and rewards ofownership. A financial liability is derecognised when theGroup’s obligation under the liability is discharged, cancelledor has expired.

IMPAIRMENT

The Board and management assess, at each reporting date,whether a financial asset is impaired. The amount of theimpairment loss is the difference between the contractual cashflows due in relation to the financial asset and the cash flowsthat the Group expects to receive, discounted at anapproximation of the original effective interest rate.

Financial assets that are measured at amortised cost andtherefore subject to the impairment provisions (the ‘expectedcredit loss model’) of PBE IFRS 9 Financial Instruments comprisecash and cash equivalents and receivables.

The impairment loss for cash and cash equivalents is consideredimmaterial.

The Group only holds receivables that have maturities of lessthan 12 months. As such, the Board and management haveapplied a simplified approach for calculating expected creditlosses (ECLs) on receivables under PBE IFRS 9 FinancialInstruments. As a result, the Board and management do nottrack changes in credit risk, but instead, recognise impairmentlosses based on lifetime ECLs at each reporting date. TheGroup's approach to ECLs reflects a probability-weighted




outcome using reasonable and supportable information that isavailable without undue cost or effort at reporting date aboutpast events, current conditions and forecasts of futureeconomic conditions.

OFFSETTING FINANCIAL ASSETS AND FINANCIALLIABILITIES

The Group offsets financial assets and financial liabilities whenit has a current legally enforceable right to set-off therecognised amounts and there is an intention to settle on a netbasis.

g) Cash and cash equivalents

Cash and cash equivalents includes cash on hand, cash held inbank accounts, demand deposits and other highly liquidinvestments with original maturities of three months or less.

h) Goods and Services Tax (GST)

Revenues, expenses, assets and liabilities are recognised in theprospective financial statements exclusive of GST, with theexception of receivables and payables which are stated inclusiveof GST. Where GST is irrecoverable as an input tax, it isrecognised as part of the related asset or expense. The netamount of GST recoverable from, or payable to, the InlandRevenue Department is included as part of receivables orpayables in the Prospective Consolidated Statement ofFinancial Position.

i) Employee entitlements

Liabilities for salaries, annual leave, long service leave andincentives are recognised in the Prospective ConsolidatedStatement of Comprehensive Revenue and Expense during theperiod in which the employee rendered the related service,when it is probable that settlement will be required and suchemployee entitlements are capable of being measured reliably.

Employee entitlements that are due to be settled within 12months are measured at their nominal values using theremuneration rate expected to apply at the time of settlement.

Employee entitlements that are not due to be settled within 12months are measured at the present value of the estimatedfuture cash outflows. The estimated future cash flows arebased on likely future entitlements accruing to staff, based onyears of service, years to entitlement, the likelihood that staffwill reach the point of entitlement, and contractual entitlementinformation.

LONG SERVICE LEAVE

Employees become eligible for long service leave after fiveyears of service.

INCENTIVES

The Guardians has an incentive scheme in place for allemployees. For some employees, a component of theirincentive payment is based on the performance of the NZSuper Fund and is calculated progressively over a rolling four-year period. During the first three years of the four-yearcalculation period, the value of the accrual is dependent on theoutcome of future periods. The liability reflected in theProspective Consolidated Statement of Financial Positionreflects the present value of the Guardians obligations inrespect of that liability. The liability has been calculated basedon a medium-term expectation of the NZ Super Fund'sperformance.

j) Statement of Cash Flows

The following are the definitions of the terms used in theProspective Consolidated Statement of Cash Flows:

Operating activities include all activities other than investing orfinancing activities. Cash inflows include all receipts from thesale of goods and services, interest and other sources ofrevenue that support the Group’s operating activities. Cashoutflows include payments made to employees, suppliers andfor taxes and levies, other than income tax.

Investing activities are those activities relating to the acquisition,holding and disposal of current and non-current securities andany other non-current assets.

Financing activities are those activities relating to changes inpublic equity and debt capital structure of the Group and thoseactivities relating to the cost of servicing the Group's equitycapital.

Cash flows are included in the Prospective ConsolidatedStatement of Cash Flows on a gross basis. The GST componentof cash flows arising from investing and financing activities,which is recoverable from, or payable to, the Inland RevenueDepartment, is classified as operating cash flows.

k) Changes in accounting policies

There have been no changes in accounting policies. Allaccounting policies have been applied consistently throughoutthese prospective financial statements.

l) Significant judgements and estimates

The preparation of the Guardians prospective financialstatements requires the Board and management to makejudgements and use estimates that affect the reportedamounts of revenue, expenses, assets, liabilities and theaccompanying disclosures. Uncertainty about thesejudgements and estimates could result in outcomes that requirea material adjustment to the carrying amounts of assets andliabilities in future periods. The judgements and estimates usedin respect of the Guardians are continually evaluated. They arebased on historical experience and other factors, includingexpectations of future events that may have a financial impacton the Guardians and that are believed to be reasonable underthe circumstances. The judgements and estimates that theBoard and management have assessed to have the mostsignificant risk of causing a material adjustment to the carryingamount of assets and liabilities within the next financial yearare as follows:

EMPLOYEE ENTITLEMENTS – LONG SERVICE LEAVE

The key assumptions used in calculating the long service leaveliability include the discount rate, the likelihood that theemployee will reach the required level of service and the salaryinflation factor. Any changes in these assumptions will affectthe carrying amount of the liability. Expected future paymentsare discounted using forward rates derived from the yield curveof New Zealand government bonds. The discount rates usedhave maturities that match, as closely as possible, the estimatedfuture cash outflows. The salary inflation factor has beendetermined after considering historical salary inflation patterns.

EMPLOYEE ENTITLEMENTS – LONG TERM PORTION OFINCENTIVES

Calculation of the long-term portion of the incentive liabilityutilises assumptions regarding the future performance of the




NZ Super Fund, the employee's average salary over the vestingperiod and the percentage of service rendered. The keyvariable is the performance of the NZ Super Fund. Should theperformance of the NZ Super Fund differ from the assumptionused in the calculation of the long-term portion of the incentiveliability, this will impact the employee entitlements expense inthe Prospective Consolidated Statement of ComprehensiveRevenue and Expense and the carrying amount of the incentiveliability in the Prospective Consolidated Statement of FinancialPosition. The Group manages this risk by using a medium-termexpectation of the NZ Super Fund's performance.

HEADCOUNT

The Guardians’ forecast is based on the key assumption thatthe headcount for the Guardians will increase from thebudgeted level of 169.7 as at the end of March 2020 to 185.4full-time equivalent employees by 30 June 2021. The actualheadcount as at end of March 2020 was 153.1.

The forecast increase in headcount numbers was determinedfrom the annual business plan compiled by the Guardians'senior management team.

In the event that the Guardians are unable to recruit theadditional headcount as forecast, actual results may varymaterially from the forecast. Any variance in actual headcountis likely to result in a material reduction of expenses, resultingin a corresponding decrease in revenue received from the NZSuper Fund.


NEW ZEALAND SUPERANNUATION FUND


Prospective Statement of Financial Position

AS AT 30 JUNE 2021 NZD'000

ASSETS

Cash and cash equivalents 5,342,527

Cash pledged as collateral 3,591,194

Trade and other receivables 3,079,009

Investments

Investments in derivative financial instruments and other financial assets 28,695,383

Investments in unconsolidated subsidiaries 4,815,422

Total investments 33,510,805

Property, plant and equipment 2,936

Intangible assets 17,956

Total assets 45,544,427

LIABILITIES

Cash collateral received (232,867)

Trade and other payables (580,384)

Income tax payable (150,523)

Provision for performance-based fees (12,124)

Deferred tax liability (67,504)

Total liabilities (1,043,402)

Net assets 44,501,025

PUBLIC EQUITY

Retained surplus 24,480,934

Asset revaluation reserve 18,011

Contributed capital 20,002,080

Total public equity 44,501,025




Prospective Statement of Comprehensive Income


INCOME

Interest income 245,178

Dividend income 552,665

Net fair value gains on financial instruments held at fair value through profit or loss 2,518,036

Net foreign exchance gains/(losses) -

Net operating income 3,315,879

EXPENSES

Reimbursement of Guardians' expenses (74,136)

Managers' fees - base (36,209)

Managers' fees - performance (15,154)

Custody fees (7,147)

Depreciation (95)

Amortisation (26)

Other expenses (34,750)

Profit for the year before income tax expense 3,148,362

Income tax expense (755,636)

Profit for the year after income tax expense 2,392,726

Other comprehensive income - not reclassifiable to profit or loss in subsequent periods

Gains/(losses) on revaluation of assets -

Income tax expense on items of other comprehensive income -

Other comprehensive income for the year, net of tax -

Total comprehensive income for the year 2,392,726




Prospective Statement of Changes in Public Equity

FOR THE YEAR ENDING 30 JUNE 2021

ASSETREVALUATION

RESERVENZD'000

CONTRIBUTEDCAPITALNZD'000

RETAINEDSURPLUSNZD'000

TOTALNZD'000

Balance at 30 June 2020 18,011 17,882,080 22,088,208 39,988,299

Profit for the year 2,392,726 2,392,726

Other comprehensive income -

Total comprehensive income for the year - - 2,392,726 2,392,726

Fund capital contributions from the Crown 2,120,000 2,120,000

Capital contributions from the Crown in respect of funding the netcost of New Zealand superannuation entitlements 16,346,000 16,346,000

Capital withdrawals by the Crown in respect of funding the net costof New Zealand superannuation entitlements (16,346,000) (16,346,000)

Balance at 30 June 2021 18,011 20,002,080 24,480,934 44,501,025




Prospective Statement of Cash Flows


CASH FLOWS FROM OPERATING ACTIVITIES


Proceeds from sale of investments 28,239,482

Dividends received 538,968

Interest received 227,573

Income tax received 84,973


Purchases of investments (33,890,764)

Managers' fees (34,577)

Payments to suppliers (126,877)

Net cash provided by/(used in) operating activities (4,961,222)

CASH FLOWS FROM INVESTING ACTIVITIES


Purchases of property, plant and equipment (1,256)

Purchases of intangible assets -

Net cash provided by/(used in) investing activities (1,256)

CASH FLOWS FROM FINANCING ACTIVITIES


Fund capital contributions from the Crown 2,120,000

Net cash provided by/(used in) financing activities 2,120,000

Net increase/(decrease) in cash and cash equivalents (2,842,478)

Cash and cash equivalents at the beginning of the financial year 8,185,005

Effects of exchange rate changes on the balance of cash held in foreign currencies -

Cash and cash equivalents at the end of the financial year 5,342,527




Summary of significant accounting policies

GENERAL INFORMATION

These are the prospective financial statements of the NewZealand Superannuation Fund (NZ Super Fund), a fundestablished under Section 37 of the New ZealandSuperannuation and Retirement Income Act 2001 (Act) on11 October 2001.

The NZ Super Fund is a long-term, growth-oriented, sovereignwealth fund that was established to help reduce the tax burdenon future taxpayers of the rising cost of New Zealandsuperannuation. The NZ Super Fund is managed andadministered by the Guardians of New ZealandSuperannuation (Guardians). The Guardians was establishedas a Crown entity by Section 48 of the Act and becameoperative from 30 August 2002. The Guardians is expected toinvest the NZ Super Fund in a commercial, prudent mannerconsistent with:

• Best-practice portfolio management;

• Maximising return without undue risk to the NZ Super Fundas a whole; and

• Avoiding prejudice to New Zealand's reputation as aresponsible member of the world community.

The NZ Super Fund's global master custodian is the NorthernTrust Corporation.

The NZ Super Fund is domiciled in New Zealand and theaddress of its principal place of business is 21 Queen Street,Auckland.

The prospective financial statements of the NZ Super Fund forthe year ending 30 June 2021 were authorised for issue inaccordance with a resolution of the Board of the Guardians ofNew Zealand Superannuation on 29 April 2020.

BASIS OF PREPARATION

The NZ Super Fund is a profit-oriented entity. The prospectivefinancial statements of the NZ Super Fund have been preparedin accordance with, and comply with, Financial ReportingStandard No. 42: Prospective Financial Statements andGenerally Accepted Accounting Practice in New Zealand (NZGAAP) as it relates to prospective financial statements.

The prospective financial statements have been prepared ona fair value basis, except for certain items as detailed in thepolicies below.

The prospective financial statements are presented in NewZealand dollars, which is the NZ Super Fund’s functionalcurrency. All values are rounded to the nearest thousanddollars (NZD'000).

Accounting policies are selected and applied in a manner thatensures the resulting financial information satisfies theconcepts of relevance and reliability, thereby ensuring the

substance of the underlying transactions or other events isreported.

The NZ Super Fund meets the definition of an investment entityand has applied the exemption from preparing prospectiveconsolidated financial statements available under NZ IFRS 10Consolidated Financial Statements. As a result, its investmentsin subsidiaries are not consolidated, but are measured at fairvalue through profit or loss in the Prospective Statement ofFinancial Position. These separate prospective financialstatements are the only prospective financial statementspresented by the NZ Super Fund.

The following particular accounting policies which materiallyaffect the preparation of the prospective financial statementshave been applied:

a) Investment entity

The NZ Super Fund meets the definition of an investment entityas the following conditions exist:

• The NZ Super Fund obtains and manages funds for thepurpose of providing its investor with investmentmanagement services;

• The NZ Super Fund has committed to its investor that itsbusiness purpose is to invest funds solely for returns fromcapital appreciation and investment income;

• The NZ Super Fund measures and evaluates theperformance of substantially all of its investments on a fairvalue basis;

• The NZ Super Fund has more than one investment; and

• The NZ Super Fund has documented exit strategies for itsinvestments.

Although the NZ Super Fund does not meet all of the typicalcharacteristics of an investment entity (namely, the NZ SuperFund does not have multiple investors, its investor is a relatedparty and it does not have ownership interests in the form ofequity), the Board and management believe the NZ Super Fundis an investment entity because it has been specificallyestablished as an investment vehicle; it has a diversifiedinvestment portfolio with best practice investment policies andprocedures in place; it invests funds for the purpose ofmaximising returns and it has elected to fair value the majorityof its investments where feasible for the purposes of itsprospective financial statements.

b) Subsidiaries

Subsidiaries are those entities (including structured entities andother holding vehicles) that are controlled by the NZ Super Fundunder the provisions of NZ IFRS 10 Consolidated FinancialStatements. The NZ Super Fund controls an entity when it isexposed to, or has rights to, variable returns from itsinvolvement with the entity and has the ability to affect thosereturns through its power to direct the activities of the entity.




The Board and management reassess whether or not the NZSuper Fund controls an entity if facts and circumstancesindicate that there are changes to one or more of the elementsof control.

Under Section 59 of the Act, the Guardians must use their bestendeavours to ensure the NZ Super Fund does not control anyother entity, with the exception of Fund Investment Vehicles(FIVs). A FIV is defined as an entity that is formed or controlledby the Guardians for the purpose of holding, facilitating ormanaging the investments of the NZ Super Fund. A FIV that iscontrolled by the Guardians is a subsidiary of the NZ Super Fundfor accounting purposes. All investment opportunities arediligently evaluated to ensure compliance with all relevant laws.

As noted above, the NZ Super Fund meets the definition of aninvestment entity and therefore the Board and managementhave applied the exemption available under NZ IFRS 10 frompreparing prospective consolidated financial statements for theNZ Super Fund. As a result, its investments in subsidiaries arenot consolidated, but are measured at fair value through profitand loss in accordance with NZ IFRS 9 Financial Instruments andare classified as ‘unconsolidated subsidiaries’ in the ProspectiveStatement of Financial Position.

c) Associates

Associates are those entities over which the NZ Super Fund hassignificant influence. Significant influence is the power toparticipate in the financial and operating policy decisions of theentity, but is not control or joint control over those policies.Investments in associates are measured at fair value throughprofit and loss in accordance with NZ IFRS 9 FinancialInstruments and classified as private equity in the ProspectiveStatement of Financial Position.

d) Joint ventures

A joint venture is a type of joint arrangement whereby theparties that have joint control have rights to the net assets ofthe arrangement. Joint control is the contractually agreedsharing of control of an arrangement, which exists only whendecisions about the relevant activities require the unanimousconsent of the parties sharing control. Investments in jointventures are measured at fair value through profit and loss inaccordance with NZ IFRS 9 Financial Instruments and classifiedas private equity in the Prospective Statement of FinancialPosition.

e) Structured entities

A structured entity is an entity that has been designed so thatvoting or similar rights are not the dominant factor in decidingwho controls the entity, such as when any voting rights relateto administrative tasks only and the relevant activities aredirected by means of contractual arrangements. A structuredentity often has some or all of the following features orattributes:

• Restricted activities;

• A narrow and well-defined objective, such as to provideinvestment opportunities for investors by passing on risksand rewards associated with the assets of the structuredentity to investors;

• Insufficient equity to permit the structured entity to financeits activities without subordinated financial support; and

• Financing in the form of multiple contractually linkedinstruments to investors that create concentrations of creditor other risks.

The NZ Super Fund is principally involved with structuredentities through its investments in private equity investmentfunds, unconsolidated subsidiaries, collective investment funds,insurance-linked investments, shareholder loans, agencymortgage-backed securities and asset-backed securities thatare issued by structured entities. The NZ Super Fund invests instructured entities to assist with the implementation of itsoverall investment strategy. The NZ Super Fund does notsponsor any structured entities.

f) Fair value measurement

The majority of the net assets of the NZ Super Fund aremeasured at fair value. Fair value is the price that would bereceived to sell an asset or paid to transfer a liability in anorderly transaction between market participants at themeasurement date.

Management uses valuation techniques for the NZ Super Fundthat are appropriate in the circumstances and for whichsufficient data is available to measure fair value, maximising theuse of relevant observable inputs. All assets and liabilities forwhich fair value is measured or disclosed in the prospectivefinancial statements are categorised within a fair valuehierarchy as follows:

Level 1 - Quoted (unadjusted) market prices in active marketsfor identical assets and liabilities. An active market is one whereprices are readily available and those prices represent actual andregularly occurring market transactions on an arm's lengthbasis. The fair value of Level 1 assets and liabilities requires littleor no judgement.

Level 2 - Valuation techniques that use observable market data.Such techniques include the use of market standarddiscounting methodologies, option pricing models and othervaluation techniques widely used and accepted by marketparticipants.

Level 3 - Valuation techniques that use inputs not based onobservable market data. Unobservable inputs are those notreadily available in an active market due to illiquidity orcomplexity of the product. These inputs are generally derivedand extrapolated from other relevant market data andcalibrated against current market trends and historictransactions. These valuations are calculated using a highdegree of management judgement.

The level within which an asset or liability is categorised in thefair value hierarchy is determined based on the lowest levelinput that is significant to the fair value measurement as awhole.

The specific valuation techniques and the observability of theinputs used in valuation models for significant productcategories are outlined below:

DERIVATIVE FINANCIAL INSTRUMENTS AND FORWARDFOREIGN EXCHANGE CONTRACTS

The fair values of derivative financial instruments and forwardforeign exchange contracts are principally determined usingvaluation techniques with market observable inputs. The mostfrequently applied valuation techniques include forward pricingand swap models using present value calculations. The models




incorporate various inputs including foreign exchange spot andforward rates, interest rates, futures prices, default rates, creditspreads, volatility curves and discount rates.

In some instances, the fair values of derivative financialinstruments are determined using valuation techniques withnon-market observable inputs. These instruments are classifiedwithin Level 3 of the fair value hierarchy and include longevitycontingent swaps, warrants and other over-the-counter swaps.The fair value of longevity contingent swaps is provided by thecounterparty at balance date. The price is a non-binding bidprice based on the fair value of the underlying basket ofcontracts. The fair value of other over-the-counter swaps isdetermined using an internally-generated discounted cash flowmodel, with the key input being interest rates.

OTHER FINANCIAL ASSETS

LISTED EQUITIES

The fair value of listed equities, including those on loan undersecurities lending and similar agreements, is determined basedon the last quoted price on the relevant exchange at balancedate and have been classified within Level 1 of the fair valuehierarchy. In some instances, where the market on which thesecurity is traded is not highly liquid (e.g. the security may belisted on an emerging market stock exchange or trading of thesecurity may be temporarily suspended), the price can also bedetermined using non-binding broker quotes. These securitieshave been classified within Level 3 of the fair value hierarchy.

FIXED INCOME SECURITIES

The fair value of highly liquid fixed income securities, includingthose on loan under securities lending and similar agreements,is determined based on the last quoted bid price provided bya reputable pricing vendor (being a financial data provider suchas Bloomberg or Thomson Reuters) or broker at balancedate and have been classified within Level 2 of the fair valuehierarchy. Where the market for fixed income securities isilliquid, fair value is determined by a reputable pricing vendorwho uses models to value the securities. The modelsincorporate various inputs including loan level data, repaymentand default assumptions and benchmark prices for similarsecurities. These securities have also been classified within Level2 of the fair value hierarchy. For illiquid securities, because ofthe inherent uncertainty of valuation, it is possible that the fairvalues estimated may differ from those that would have beendetermined had a ready market for those securities existed andthose differences may be significant. These securities have beenclassified within Level 3 of the fair value hierarchy.

The fair value of unlisted debt instruments, including fixed andfloating rate instruments, that form part of an investment intoa private equity investment, are valued by a suitably qualifiedindependent valuer who ascribes an enterprise value to theentire private equity investment then apportions that valueacross the instruments held, including the debt instruments.These securities have been classified within Level 3 of the fairvalue hierarchy.

COLLECTIVE INVESTMENT FUNDS

The fair value of collective investment funds is provided by theinvestment managers or administrators at balance date. Theprice is based on the fair value of the underlying net assets orsecurities of the collective investment fund. Their classificationwithin the fair value hierarchy is determined by the lowest levelclassification of the underlying instruments.

INSURANCE- LINKED INVESTMENTS

Insurance-linked investments which are catastrophe bonds arevalued using prices provided by reputable pricing vendors orbrokers at balance date and have been classified within Level 2of the fair value hierarchy.

PRIVATE EQUITY

The fair value of private equity investment funds is provided bythe investment managers or administrators at balance date.The price is based on the fair value of the underlying net assetsof the private equity investment fund which is determined usinga variety of methods, including independent valuations,valuation models based on the price of recent transactions,earnings multiples or discounted cash flows and have beenclassified within Level 3 of the fair value hierarchy. Privateequity investments (not invested via a managed fund structure)are valued by reference to either an independent valuation orthe price of recent investments and have also been classifiedwithin Level 3 of the fair value hierarchy.

UNCONSOLIDATED SUBSIDIARIES

The fair value of unconsolidated subsidiaries is based on thefair value of the underlying net assets of the specific investmentwhich can be determined using a variety of methods, includingbeing based on the last quoted bid price provided by areputable pricing vendor or broker, independent valuations,valuation models based on the price of recent transactions,earnings multiples or discounted cash flows. Unconsolidatedsubsidiaries have been classified accordingly within Levels 2 and3 of the fair value hierarchy.

INTANGIBLE ASSETS

Allocations of New Zealand Units (NZUs) and/or other carboncredits that the NZ Super Fund owns are recognised at netrealisable value where they have been received, or where theBoard and management is reasonably certain they will bereceived, and a price can be reliably ascertained either throughthe existence of an observable active market or through pricingobtained from reputable brokers.

g) Financial instruments

A financial instrument is any contract that gives rise to afinancial asset of one entity and a financial liability or equityinstrument of another entity.

The NZ Super Fund is party to financial instruments as part ofits normal operations. These financial instruments make up thevast majority of the NZ Super Fund's net assets and include cashand cash equivalents, derivative financial instruments, forwardforeign exchange contracts, investments, receivables andpayables. All financial instruments are recognised in theProspective Statement of Financial Position and all income andexpenditure in relation to financial instruments are recognisedin the Prospective Statement of Comprehensive Income.

INITIAL RECOGNITION

Financial assets and financial liabilities are recognised in theProspective Statement of Financial Position when the NZ SuperFund becomes a party to the contractual provisions of thefinancial instrument. They are initially recognised at fair valueplus, in the case of financial assets and financial liabilities notrecorded at fair value through profit or loss, transaction costs(e.g. trading commission) that are attributable to theacquisition of the financial asset or financial liability.Transaction costs of financial assets carried at fair value through




profit or loss are expensed in the Prospective Statement ofComprehensive Income.

Purchases or sales of financial instruments that require deliverywithin a time frame established by regulation or convention inthe market place are recognised on the trade date, i.e. the dateon which the NZ Super Fund commits to purchase or sell thefinancial instrument.

The classification of financial instruments at initial recognitiondepends on the NZ Super Fund’s business model for managingthe financial assets and the financial asset’s contractual cashflow characteristics. In making an assessment of the businessmodel for managing a financial asset, the Board andmanagement consider all relevant information such as theinvestment objectives of the NZ Super Fund and howperformance is evaluated and reported to the Board andmanagement.

SUBSEQUENT MEASUREMENT

The NZ Super Fund’s financial assets and financial liabilities aresubsequently classified into the following categories:

• Those to be measured at fair value through profit or loss;and

• Those to be measured at amortised cost.

The NZ Super Fund does not have any financial assets classifiedas financial assets at fair value through other comprehensiveincome. The NZ Super Fund classifies all financial assets that areeither held for trading and/or managed or evaluated on a fairvalue basis, as financial assets at fair value through profit or loss.

The NZ Super Fund’s financial assets are reclassified when, andonly when, the business model for managing those financialassets changes.

Financial assets and financial liabilities at fair value throughprofit or loss

The following financial assets and financial liabilities areclassified at fair value through profit or loss (FVPL):

• Financial assets, including debt instruments, that do notqualify for measurement at amortised cost;

• Financial assets and financial liabilities that are held fortrading; and

• Financial assets for which the NZ Super Fund has not electedto recognise fair value gains and losses through othercomprehensive income.

This category includes investments in derivative financialinstruments, forward foreign exchange contracts, listedequities, collective investment funds, insurance-linkedinvestments, private equity and unconsolidated subsidiaries.These financial assets are either held for trading or are managedand have their performance evaluated on a fair value basis.

The NZ Super Fund does not designate any derivative financialinstruments or forward foreign exchange contracts as hedgesin a hedging relationship.

Financial assets and financial liabilities at fair value throughprofit or loss are recognised in the Prospective Statement ofFinancial Position at fair value with changes in fair value beingrecognised in the Prospective Statement of ComprehensiveIncome in the period in which they arise.

Financial assets at amortised cost

The NZ Super Fund’s financial assets are classified at amortisedcost if both of the following criteria are met:

• The financial asset is held within a business model whoseobjective is to hold financial assets in order to collect thecontractual cash flows; and

• The contractual terms of the financial asset give rise to cashflows that are solely payments of principal and interest.

This category includes cash and cash equivalents, cash pledgedas collateral, trade and other receivables, reverse repurchaseagreements and some unlisted debt instruments. Unlisted debtinstruments that are classified as financial assets at amortisedcost include fixed and floating rate notes and redeemablepreference shares.

Subsequent to initial recognition, financial assets at amortisedcost are measured at amortised cost using the effective interestmethod and are subject to impairment. When a financial assetis impaired, impairment losses are recognised in the ProspectiveStatement of Comprehensive Income in the period in whichthey arise.

Financial liabilities at amortised cost

Financial liabilities at amortised cost are non-derivative financialliabilities. This category includes cash collateral received andtrade and other payables. Subsequent to initial recognition,these financial liabilities are measured at amortised cost usingthe effective interest method.

DERECOGNITION

Financial assets are derecognised when the rights to receivecash flows from the assets have expired or when the NZ SuperFund has transferred substantially all of the risks and rewardsof ownership. A financial liability is derecognised when the NZSuper Fund’s obligation under the liability is discharged,cancelled or has expired.

IMPAIRMENT

The Board and management assess, at each reporting date,whether a financial asset or a group of financial assets isimpaired. The amount of the impairment loss is the differencebetween the contractual cash flows due in relation to thefinancial asset or the group of financial assets and the cashflows that the NZ Super Fund expects to receive, discounted atan approximation of the original effective interest rate.

The following financial assets that are measured at amortisedcost are subject to the impairment provisions (the ‘expectedcredit loss model’) of NZ IFRS 9 Financial Instruments:

• Cash and cash equivalents;

• Cash pledged as collateral;

• Trade and other receivables;

• Reverse repurchase agreements; and

• Unlisted debt investments carried at amortised cost.

The impairment loss for cash and cash equivalents and cashpledged as collateral is considered immaterial.

The NZ Super Fund only holds trade receivables that havematurities of less than 12 months and which have no financingcomponents. As such, the Board and management haveapplied a simplified approach for calculating expected creditlosses (ECLs) on trade receivables under NZ IFRS 9 Financial




Instruments. As a result, the Board and management do nottrack changes in credit risk, but instead, recognise impairmentlosses based on lifetime ECLs at each reporting date. The NZSuper Fund's approach to ECLs reflects a probability-weightedoutcome using reasonable and supportable information that isavailable without undue cost or effort at reporting date aboutpast events, current conditions and forecasts of futureeconomic conditions.

The NZ Super Fund’s investments in reverse repurchaseagreements and unlisted debt instruments that meet thecriteria for being classified as financial assets at amortised costand which are therefore subject to the expected credit lossmodel, are considered to have low credit risk and/or the creditrisk has not increased significantly since initial recognition. Asa result, the impairment loss recognised is limited to 12-monthexpected credit losses. The Board and management considerthese financial assets to have low credit risk because there isa low risk of default and the issuers have a strong capacity tomeet their contractual cash flow obligations in the short term.

12-month expected credit losses are the portion of expectedcredit losses that result from default events that are possiblewithin the 12 months after the reporting date or a shorterperiod if the expected life of the financial asset is less than 12months.

Loss allowances for financial assets measured at amortised costare deducted from the gross carrying amount of the assets. Thegross carrying amount of a financial asset is written-off whenthe Board and management have no reasonable expectationsof recovering a financial asset.

OFFSETTING FINANCIAL ASSETS AND FINANCIALLIABILITIES

The NZ Super Fund offsets financial assets and financialliabilities when it has a current legally enforceable right to set-off the recognised amounts and there is an intention to settleon a net basis.

h) Securities Lending and similar agreements

Securities lending transactions are usually collateralised bysecurities or cash. The transfer of the securities tocounterparties is only reflected in the Prospective Statement ofFinancial Position if the risks and rewards of ownership are alsotransferred. Collateral advanced by the borrower in the formof readily marketable securities (non-cash) is held in escrow bya third party agent. Recourse of those securities is onlyavailable in the event of default of the borrower and, becauseof this, the non-cash collateral is not recognised in theProspective Statement of Financial Position. Collateraladvanced by the borrower in the form of cash is recognised asan asset in the Prospective Statement of Financial Position,along with a corresponding obligation to repay the cashcollateral to the borrower, once the securities have beenreturned.

Securities purchased under reverse repurchase agreements toresell at a specified future date are not recognised in theProspective Statement of Financial Position. The considerationpaid, including accrued interest, is recorded separately in theProspective Statement of Financial Position as an investment,reflecting the transaction’s economic substance as a loan by theNZ Super Fund. The difference between the purchase andresale prices is recorded in interest income and is accrued overthe life of the agreement using the effective interest rate.

i) Cash and cash equivalents

Cash and cash equivalents includes cash balances on hand,cash held in bank accounts, demand deposits and other highlyliquid investments with original maturities of three months orless, which have an insignificant risk of change in fair value.

j) Goods and Services Tax (GST)

Income, expenditure, assets and liabilities are recognised in theprospective financial statements exclusive of GST, with theexception of receivables and payables which are stated inclusiveof GST. Where GST is irrecoverable as an input tax, it isrecognised as part of the related asset or expenditure. The netamount of GST recoverable from, or payable to, the InlandRevenue Department is included as part of receivables orpayables in the Prospective Statement of Financial Position.

k) Trade and other payables

Trade and other payables represent amounts due to thirdparties in the normal course of business and to the Guardiansfor the reimbursement of expenses. Trade payables are non-interest bearing and are normally settled on 30-day terms. TheNZ Super Fund has risk management policies in place to ensurethat all payables are paid within the credit time frame.

The timing and amount of expected cash flows for unsettledpurchases are certain as they are based on contractual termsand corporate actions.

Other than the non-current portion of trade and otherpayables, all payables are expected to settle within one year.The non-current payable will settle progressively over a four-year period.

Short-term trade and other payables are initially recognised atfair value, then subsequently at amortised cost. As a result oftheir short-term nature, the carrying amount of trade and otherpayables held at amortised cost approximates fair value.

l) Property, plant and equipment

RECOGNITION AND MEASUREMENT

All items of property, plant and equipment are initiallyrecognised at cost. Cost includes the value of considerationexchanged and those expenses directly attributable to bringingthe item to working condition for its intended use.

Subsequent to initial recognition, all items of property, plantand equipment are stated at cost less accumulated depreciationand impairment losses.

DERECOGNITION

An item of property, plant and equipment is derecognisedwhen it is sold or otherwise disposed of or when no futureeconomic benefits are expected to arise from its continued use.Any gain or loss arising on disposal (being the differencebetween the net disposal proceeds and the carrying amountof the item) is included in the Prospective Statement ofComprehensive Income in the year in which the item isdisposed of.

IMPAIRMENT

All items of property, plant and equipment are assessed forimpairment at each balance date. If any indication ofimpairment exists, an estimate of the asset's recoverableamount is calculated, being the greater of fair value less coststo sell and value in use. Where the carrying amount of an assetis greater than its recoverable amount, the asset is written




down to its recoverable amount. The write-down is recognisedin the Prospective Statement of Comprehensive Income. Wherean impairment loss subsequently reverses, the carrying amountof the item is increased to the revised estimate of itsrecoverable amount, but only to the extent that the increasedcarrying amount does not exceed the carrying amount whichwould have been determined had no impairment loss beenrecognised for the item in prior years. A reversal of animpairment loss is recognised in the Prospective Statement ofComprehensive Income immediately.

DEPRECIATION

Depreciation is provided on a straight-line basis to write off thecost of property, plant and equipment to estimated residualvalue over their estimated useful lives. The estimated usefullives of the major categories of property, plant and equipmentare as follows:

Computer and office equipment 3 years

Office fit-out 12 years

The cost of office fit-out is capitalised and depreciated over theunexpired period of the lease (held by the Guardians) or theestimated remaining useful lives of the improvements,whichever is shorter.

m) Provision for performance-based fees

A provision is recognised in the Prospective Statement ofFinancial Position when the NZ Super Fund has a presentobligation arising as a result of a past event, it is probable thatcash will be paid to settle the obligation and the amount canbe estimated reliably. The amount recognised as a provision isthe best estimate of the consideration required to settle thepresent obligation at balance date, taking into considerationthe risks and uncertainties surrounding the obligation. Wherea provision is measured using the cash flows estimated to settlethe present obligation, its carrying amount is the present valueof those cash flows.

Where some or all of the economic benefits required to settlea provision are expected to be recovered from a third party, areceivable is recognised as an asset if it is virtually certain thatrecovery will be received and the amount of the receivable canbe measured reliably.

n) Fund capital

PURPOSE

Fund capital, which comprises investments and all other assetsof the NZ Super Fund less any liabilities, is the property of theCrown. The NZ Super Fund’s purpose is to build a portfolio ofassets to help reduce the impact of providing retirementincome, in the form of New Zealand superannuation, to anageing population.

CAPITAL CONTRIBUTIONS

The Crown is required to make capital contributions to the NZSuper Fund in accordance with Sections 42 to 44 of the NewZealand Superannuation and Retirement Income Act 2001(Act). These capital contributions are made by the Crown forinvestment purposes based on a percentage of Gross DomesticProduct (GDP). Under Section 44 of the Act, the Crown isentitled to contribute lesser amounts than calculated using theformula under Section 43 of the Act. Capital contributions tothe NZ Super Fund are forecast at $2.1 billion for the year to

30 June 2021. Capital contributions will increase in thefollowing year, with $2.42 billion planned for the NZ SuperFund in 2021/2022. Full capital contributions are projected toresume from 2022/23 under current Treasury modelling, butthis may change based on future Fiscal and Economic Updates.Fund capital contributions are recorded in the ProspectiveStatement of Changes in Public Equity.

CAPITAL WITHDRAWALS

Under Section 47 of the Act, no withdrawal of capital ispermitted from the NZ Super Fund prior to 1 July 2020.

SUPERANNUATION ENTITLEMENTS

Under Section 45 of the Act, the Minister of Finance mustensure that sufficient money is transferred into the NZ SuperFund in each financial year to meet the net cost of thesuperannuation entitlements that are payable out of the NZSuper Fund during that year. This requirement is additional toand separate from the obligation to make annual capitalcontributions. As no capital withdrawals are permitted from theNZ Super Fund prior to 1 July 2020, the Minister of Finance isobliged to provide funding to meet superannuationentitlements in the interim. The Treasury, through the NewZealand Debt Management Office, has facilitated funding forthese superannuation entitlements from the Minister ofFinance to the Ministry of Social Development on behalf of theNZ Super Fund. The Guardians has no control over thesetransfers, with The Treasury acting as agent for the NZ SuperFund. Transfers for superannuation entitlements are recordedin the Prospective Statement of Changes in Public Equity.

MANAGEMENT OF FUND CAPITAL

The NZ Super Fund is a profit-oriented entity, managed by theGuardians. The Guardians' mandate is to invest the NZ SuperFund on a prudent, commercial basis and, in doing so, ensurethat the NZ Super Fund is managed and administered in amanner consistent with best-practice portfolio management,maximising return without undue risk to the NZ Super Fund asa whole, and avoiding prejudice to New Zealand's reputationas a responsible member of the world community. Thecontributions from the Crown to the NZ Super Fund areinvested in accordance with its Statement of InvestmentPolicies, Standards and Procedures, which is available atwww.nzsuperfund.co.nz.

o) Income

Income is recognised when it is probable that economicbenefits will flow to the NZ Super Fund and the income can bereliably measured, regardless of when payment is being made.The following specific recognition criteria must also be metbefore income is recognised:

INTEREST INCOME

Interest income comprises interest on financial instrumentsmeasured at fair value through profit or loss and interest onfinancial assets measured at amortised cost.

For financial instruments measured at fair value, interestincome is recognised on an accruals basis, either daily or on ayield-to-maturity basis. For financial assets measured atamortised cost, interest income is recognised as the interestaccrues using the effective interest method, which allocatesinterest at a constant rate of return over the expected life of thefinancial instrument based on the estimated future cash flows.




DIVIDEND INCOME

Dividend income is recognised when the shareholder's rightsto receive payment has been established, normally the ex-dividend date. Where the NZ Super Fund has elected to receivedividends in the form of additional shares rather than cash, theamount of the cash dividend foregone is recognised as income.Any excess in the value of shares received over the amount ofcash dividend foregone is recognised as a gain in theProspective Statement of Comprehensive Income.

p) Foreign currency translation

Transactions denominated in foreign currencies are convertedto New Zealand dollars using the exchange rates prevailing atthe dates of the transactions. Foreign currency monetary assetsand liabilities are translated at the exchange rate prevailing atbalance date. Where there is a movement in the exchange ratebetween the date of a foreign currency transaction and balancedate, the resulting exchange differences are recognised in theProspective Statement of Comprehensive Income.

q) Income tax

In accordance with Section HR 4B of the Income Tax Act 2007,income derived by the NZ Super Fund is subject to New Zealandtax determined using the rules applying to companies. Theincome tax expense recognised in the Prospective Statementof Comprehensive Income comprises current and deferred taxand is based on accounting profit, adjusted for permanentdifferences between accounting and tax rules. Income taxrelating to items of other comprehensive income is recognisedin other comprehensive income.

Current tax is the expected tax payable to or receivable from thetaxation authorities based on the taxable income or loss for theyear and any adjustment in respect of prior years. It is calculatedusing tax rates and tax laws that have been enacted orsubstantively enacted at balance date.

Deferred tax is recognised in respect of temporary differencesbetween the carrying amount of assets and liabilities forfinancial reporting purposes and the tax bases of assets andliabilities at balance date. Deferred tax liabilities are recognisedfor all taxable temporary differences, except:

• The initial recognition of goodwill;

• The initial recognition of assets or liabilities that affectsneither accounting nor taxable profit or loss other than ina business combination; and

• Temporary differences relating to investments insubsidiaries, associates and interests in joint ventures whereit is probable that they will not reverse in the foreseeablefuture.

Deferred tax assets are recognised for all deductible temporarydifferences, the carry forward of unused tax credits and unusedtax losses only to the extent that it is probable that sufficienttaxable profit will be available to utilise the deductibletemporary differences, the carry forward of unused tax creditsand unused tax losses. The carrying amount of deferred taxassets is reviewed at each balance sheet date and reduced tothe extent that it is no longer probable that sufficient taxableprofit will be available to allow all or part of the deferred taxasset to be utilised.

Deferred tax assets and liabilities are measured at the tax ratesthat are expected to apply in the year when the asset is realised

or the liability is settled, based on tax rates and tax laws thathave been enacted or substantively enacted at balance date.

Deferred tax assets and liabilities are offset when a legallyenforceable right to set-off exists, the deferred tax balancesrelate to income taxes levied by the same taxation authority andthe NZ Super Fund intends to settle on a net basis.

r) Statement of Cash Flows

The following are the definitions of the terms used in theProspective Statement of Cash Flows:

Operating activities include all activities other than investing orfinancing activities.

Investing activities are those activities relating to the acquisition,holding and disposal of property, plant and equipment andintangible assets.

Financing activities are those activities relating to capitalcontributions and to payments of superannuationentitlements. As the current funding by the Crown ofsuperannuation entitlements flows directly from the Treasuryto the Ministry of Social Development, it is not considered cashflow of the NZ Super Fund and accordingly, is not recorded inthe Prospective Statement of Cash Flows.

Cash flows are included in the Prospective Statement of CashFlows on a gross basis. The GST component of cash flowsarising from investing and financing activities, which isrecoverable from, or payable to, the Inland RevenueDepartment, is classified as operating cash flows.

s) Changes in accounting policies

There have been no changes in accounting policies. Allaccounting policies have been applied consistently throughoutthese prospective financial statements.

t) Significant judgements and estimates

The preparation of the NZ Super Fund’s prospective financialstatements requires the Board and management to makejudgements and use estimates that affect the reportedamounts of income, expenditure, assets, liabilities and theaccompanying disclosures. Uncertainty about thesejudgements and estimates could result in outcomes that requirea material adjustment to the carrying amounts of assets andliabilities in future periods. The judgements and estimates usedin respect of the NZ Super Fund are continually evaluated. Theyare based on historical experience and other factors, includingexpectations of future events that may have a financial impacton the NZ Super Fund and that are believed to be reasonableunder the circumstances. The judgements and estimates thatthe Board and management have assessed to have the mostsignificant risk of causing a material adjustment to the carryingamounts of assets and liabilities within the next financial yearare as follows:

ASSESSMENT AS AN INVESTMENT ENTITY

The Board and management reassess the NZ Super Fund'sinvestment entity status on an annual basis, if any of thecriteria or characteristics change.

ASSESSMENT OF CONTROL, JOINT CONTROL ORSIGNIFICANT INFLUENCE

The Board and management have assessed the NZ SuperFund’s investments in subsidiaries in light of the control modelestablished under NZ IFRS 10 Consolidated Financial




Statements to ensure the correct classification and disclosureof investments in subsidiaries. The NZ Super Fund holdsinvestments in a number of entities that are not consideredsubsidiaries even though its ownership interest exceeds 50%.The Board and management have concluded that the NZ SuperFund has no unilateral power to direct the relevant activities ofthese entities and therefore it does not have control of theseentities.

The Board and management have assessed the NZ SuperFund’s investments in associates in light of the definition ofsignificant influence included in NZ IAS 28 Investments inAssociates and Joint Ventures. The NZ Super Fund holdsinvestments in a number of entities that are not consideredassociates even though its ownership interest exceeds 20%.The Board and management have concluded that the NZ SuperFund has no power to participate in the financial and operatingpolicy decisions of these entities and therefore it does not havesignificant influence over these entities.

The considerations made in determining joint control are similarto those necessary to determine control over subsidiaries. TheNZ Super Fund’s joint arrangements are classified as jointventures because certain key operating and financial activitiesrequire the approval of the NZ Super Fund as well as at leastone other investor and the contractual arrangements providethe parties with rights to the net assets of the jointarrangements.

ASSESSMENT OF INVESTMENTS IN STRUCTURED ENTITIES

The Board and management have assessed which of the NZSuper Fund’s investments are investments in structuredentities. In doing so, the Board and management haveconsidered voting rights and other similar rights afforded toinvestors as well as any contractual arrangements in place withthese investments.

The Board and management have concluded that certain of theNZ Super Fund's investments meet the definition of a structuredentity because:

• The voting rights in the investments are not the dominantfactor in deciding who controls the investment; and

• The investments have narrow and well-defined objectivesto provide investment opportunities to investors.

DETERMINATION OF FAIR VALUE

Where the fair value of assets and liabilities cannot be measuredbased on quoted prices in active markets, fair value isdetermined using valuation techniques with market observableinputs from third parties such as brokers or pricing vendors. Forassets that have no quoted price (which principally consist ofinvestments in private equity investment funds, collectiveinvestment funds, fixed income securities and certain derivativefinancial instruments) the determination of fair value requiressignificant judgement. Fair value for these assets is determinedas follows:

Private equity investment funds and collective investmentfunds where fair value is provided by investment managers oradministrators

The fair value of private equity investment funds and collectiveinvestment funds is provided by the investment managers or

administrators at balance date. Depending on the nature of theunderlying instruments, investment managers andadministrators may use observable market prices, their ownmodels or they may engage independent valuers who usemodels to obtain the fair value of investments. The Board andmanagement may also directly appoint independent valuers toobtain the fair value of certain investments where thisinformation is unable to be provided by an investment manageror administrator or where an investment is directly managedby the NZ Super Fund.

Fixed income securities where fair value is determined by apricing vendor

Where the market for fixed income securities is illiquid, fairvalue is determined by a pricing vendor who uses models tovalue the securities. The Board and management mitigate therisk of pricing errors by only selecting reputable pricing vendorsand by periodically calibrating prices against observable marketdata.

Derivative financial instruments where fair value is determinedby a pricing vendor, broker or counterparty

Pricing vendors, brokers or counterparties may use valuationmodels to price certain derivative financial instruments forwhich the inputs may include current and forward exchangerates, estimates of cash flows, interest rates, futures prices,default rates, credit spreads, volatility curves, indicative pricesfor similar assets and discount rates. The Board andmanagement mitigate the risk of pricing errors by only selectingreputable pricing vendors, brokers or counterparties and byperiodically calibrating prices against observable market data.

Transfers between levels of the fair value hierarchy

The classification of investments within the fair value hierarchyis reviewed annually. Transfers between the different levels ofthe hierarchy generally occur where there is a change in thetrading status of a financial instrument (such as listing on arecognised exchange, suspension of trading or de-listing).

OTHER SIGNIFICANT ESTIMATES AND JUDGEMENTS

Investment returns for the forecast period are based on internalmodelling of 20-year returns.

Management fees included in the forecast are based oninvestment management agreements that were in place on thedate the forecast was approved by the Board. The Guardians’expenses are allocated according to the current allocationmodel.

The forecast has largely been based on actual experience todate with exception of the impact of foreign currency. Noforeign currency impact has been forecast.

Material differences between the forecast and actual returnsmay also occur due to three other major factors:

• Investment markets generate returns at a level that isgreater or lesser than the rate assumed in this forecast;

• The asset mix of the NZ Super Fund changes in response toopportunities not anticipated in this forecast; and

• Foreign currency movements.




SIGNED ON BEHALF OF THE BOARD

Catherine Savage, Chair Catherine Drayton,Chair Audit Committee

www.nzsuperfund.nz

statement of performance expectations 2020-2021 · statement of performance expectations 2020-2021...

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