Gillian Dudgeon
by David Chaplin
Despite analysis suggesting it would be “most efficient” to close the almost-drained Earthquake Commission (EQC) investment fund, which had NZ$6 billion (A$5.4 billion) invested prior to the Christchurch disaster, the NZ Government has backed its continued existence in a discussion document published last week.
However, on current settings it will be a long recovery for the EQC’s National Disaster Fund (NDF), which by the end of the year is expected to have zero assets, minimal revenue prospects and a dearth of in-house investment expertise.
Prior to the September 2010 Christchurch earthquake, the NDF reported assets of almost NZ$6 billion, about a third of which was invested in global equities.
The NDF began selling down its global equities portfolio soon after the September 2010 Christchurch quake, first redeeming a NZ$320 million Alliance Bernstein mandate. However, following the more-damaging February 2011 earthquake, the EQC accelerated the sell-down, exiting its remaining offshore share mandates – with State Street Global Advisors, Tweedy Browne, T. Rowe Price and Capital International – in the first half of 2012, the fund’s interim ‘Statement of investment policies, standards and procedures’ says.
Gillian Dudgeon, EQC general manager shared services, said the remaining NDF assets reverted to a mix of cash and NZ government bonds.
“Approximately two-thirds of the current fund is held in New Zealand Government Securities, which are managed by the Treasury Debt Management Office,” Dudgeon said. “EQC maintains an ongoing dialogue with the office as to when cash may be required to settle customer claims and other expenses. The remainder is held in on-call products with New Zealand approved banks with available rates reviewed regularly.”
According to a Treasury spokesperson, the NDF, which is recorded with assets of about NZ$2.5 billion in the latest government books, should “fully deplete… during the current fiscal year” as the EQC pays out on claims, largely due to the 2010/11 Canterbury earthquakes.
The latest EQC ‘Statement of performance expectations’, published earlier this month, puts the NDF in negative balance over the next two financial years, with no investment purchases forecast during the period.
While the EQC now receives annual premiums (collected as a levy on private home insurance policies) of about NZ$280 million – up from roughly NZ$66 million prior to the Christchurch quakes – most of that is soaked up in reinsurance costs, of NZ$165 million, and administrative expenses.
If it were to be recapitalised by premiums alone, it would clearly taking decades to for the EQC fund to reach its former glory.
EQC’s Dudgeon said how the NDF is rebuilt “will be discussed as part of the current review of the Earthquake Commission Act”.
While the NDF always had a relatively small investment team, it is understood the EQC does not currently employ specialist staff in the area.
Current Worksafe NZ CFO, Phillip Jacques, who was the front man for the EQC investment team, left the organisation mid-2013. In his final EQC role as head of corporate services, Jacques was responsible for “finance, information technology, risk and assurance, business information, investment management and commercial services”, his Linkedin page says.
“Decisions about fund management would need to be made once the current review of the Earthquake Commission Act is completed and decisions made about rebuilding the NDF,” Dudgeon said.
The Government’s EQC review discussion document says: “Finance theory suggests the most efficient approach to financing would be to close the NDF and instead finance natural disaster risk centrally through the Treasury.
“This is because, for low-probability high-impact risks, it is more efficient to pool resources against a diversified portfolio of risks, rather than create a range of ring-fenced funds for different risks.”
But given a large portion of the EQC fund is in NZ Government stock those “efficiencies are less than they appear”, the review document says.
However, the report argues the main reason to keep the NDF would be to boost ongoing public acceptance of the annual EQC premium impost.
“NDF also gives future governments the flexibility to adjust the mix of central government and EQC management of the fund’s resources, by adjusting the NDF’s investment mandate,” the document says.
“Retaining the NDF also preserves maximum policy flexibility for the Crown. The NDF investment portfolio can be adjusted as policy thinking about the optimal financing strategy for the fund evolves.”
The EQC discussion document also says the government could look other state-owned funds – such as New Zealand Superannuation Fund and the Accident Compensation Commission fund – for guidance on the future of the NDF.
“In retaining the NDF, provisions for the fund and how it is managed may be updated to reflect insights from legislation covering Crown Financial Institutions, established since the 1993 EQC Act,” the document says.
Submissions on the EQC review proposals are due by September 11 this year.
– Investment News NZ