The Government Superannuation Fund Authority (GSF) says the attractive investment returns from catastrophe bonds outweigh the risks of investing in climate-related catastrophes.
The GSF’s top brass told Parliament's Finance and Expenditure Committee (FEC) during its annual review on Wednesday that approximately 3%, or $164 million, of the Authority’s fund is invested in the catastrophe bond market.
Chair Anne Blackburn said the fund currently manages about $5.5 billion.
The GSF was established in 1948 to provide public sector employees an opportunity to save for their retirement via contributors making regular contributions to the fund. In return, contributors receive a defined level of income at retirement.
The scheme started to wind down on taking new members in 1992 before officially closing the door to new members in 1995.
Blackburn told the FEC on Wednesday there are currently 3,000 contributors to the fund and the majority of its clients are made up of 42,000 pensioners.
In the 12 months to June 2024, Blackburn said roughly $1 billion was paid out in pensions to that base and the fund had returned 14.3%, which she described as a “strong performance”.
Over the last decade, the fund has returned 8.8%.
“We measure ourselves against the New Zealand bond index, so we've outperformed that very substantially,” Blackburn said.
Attractive risk
The subject of catastrophe insurance was brought up when Labour Party finance spokesperson Barbara Edmonds asked for more information on the GSF’s investment into it.
“It would appear to be quite risky,” Edmonds said.
Chief Executive Tim Mitchell said the catastrophe risks that GSF covers are “peak perils” like earthquakes in North America and Japan.
“The way the catastrophe bond market works for us is that we are the second line of defense when disaster hits. The first line is met by the insurer and then effectively we’re the reinsurer up above a level,” Mitchell said.
From a risk perspective, catastrophe bonds looked “very different” to anything else the GSF had in its investment portfolio – which Mitchell said made it attractive.
“They're not affected by economic conditions, they're not affected by interest rates, things like that,” he said.
In the 12 months to June 2024, the GSF’s investment into catastrophe insurance gave a return of 14.7%, a higher percentage return than the overall fund’s 14.3% return in that period.
“We’re always looking at this – how much are we being paid to take on risk? Is it an attractive time to be taking on more risk or should we be letting that risk dial down as we go through a sort of reinsurance cycle?” Mitchell said.
Blackburn said the catastrophe risk was uncorrelated to the other risks in the GSF’s investment portfolio.
She said catastrophe insurance was an area that the board had spent “quite a lot of time focusing on” because of changes in the environment and risks were priced in annually.
“We remain comfortable with the risk we’re taking,” she told the committee.
On the horizon
The average age of GSF contributors is 62 and the GSF is bracing itself for contributions to stop over the next decade. Despite this, Mitchell described the fund as having “a very long horizon”.
“So while the contributors stop within the next decade or so, we'll still continue to pay pensions for another 40 or 50 years. It's going to tail off, obviously, as people will be getting very old,” he said.
Mitchell told the committee the GSF was in a period of looking at strategic options as it had previously done work around what happens to the number of contributors and pensioners over the next 20 years.
It found the total number of members declines by about 70% and the size of the fund falls to about $2.5 billion in that timeframe.
Mitchell said the fund had “reasonably significant exposure” to private equity – which currently makes up about 18% of the fund – and that exposure will change as the fund declines.
“And as the fund declines, we won't be able to keep topping up that exposure because we'll be worried about the liquidity of that as payouts take place,” he said.
This means the GSF’s investment strategy will be gradually adapted, although Mitchell told MPs the 18% stake in private equity would slightly increase in the short-term before starting to decline long-term.
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Chair Anne Blackburn said the fund currently manages about $5.5 billion.
Blackburn told the FEC on Wednesday there are currently 3,000 contributors to the fund and the majority of its clients are made up of 42,000 pensioners.
In the 12 months to June 2024, Blackburn said roughly $1 billion was paid out in pensions to that base and the fund had returned 14.3%, which she described as a “strong performance”.
So it paid out 1 bil and made 786 mil?
The average age of GSF contributors is 62 and the GSF is bracing itself for contributions to stop over the next decade. Despite this, Mitchell described the fund as having “a very long horizon”.
so it paid out 23k on average to each pensioner and held about 122k for each person in the system.
no wonder they are looking at higher risk bonds, they may be in an interesting position if average bonds drop in yields...
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