GOVERNMENT SUPERANNUATION FUND AUTHORITY

B. 20 Reports of the GOVERNMENT SUPERANNUATION FUND AUTHORITY FOR THE PERIOD FROM 2 OCTOBER 2001 TO 30 JUNE 2002 Presented to the House of Representatives pursuant to Section 44A of the Public Finance Act 1989. GOVERNMENT SUPERANNUATION FUND FOR THE YEAR ENDED 30 JUNE 2002 Presented to the House of Representatives pursuant to Section 93B of the Government Superannuation Fund Act 1956.

CONTENTS Page GOVERMENT SUPERANNUATION FUND AUTHORITY CHAIRMAN S REPORT... 3 STATEMENT OF GOVERNANCE AND ACCOUNTABILITY... 6 STATEMENT OF RESPONSIBILITY... 8 STATEMENT OF SERVICE PERFORMANCE... 9 STATEMENT OF FINANCIAL PERFORMANCE... 15 STATEMENT OF FINANCIAL POSITION... 16 STATEMENT OF CASH FLOWS... 17 STATEMENT OF MOVEMENT IN PUBLIC EQUITY... 18 STATEMENT OF COMMITMENTS... 19 STATEMENT OF CONTINGENT LIABILITIES... 20 STATEMENT OF ACCOUNTING POLICIES... 21 NOTES TO THE FINANCIAL STATEMENTS... 23 AUDIT REPORT... 27 DIRECTORY... 29 GOVERMENT SUPERANNUATION FUND Page AUTHORITY'S REPORT... 31 REGULATORY STATEMENT... 34 STATEMENT OF RESPONSIBILITY... 35 INVESTMENT COMMENTARY... 36 MEMBERSHIP COMMENTARY... 39 STATEMENT OF CHANGES IN NET ASSETS... 41 STATEMENT OF NET ASSETS... 42 STATEMENT OF CASH FLOWS... 43 JUDGES SUPERANNUATION ACCOUNT... 46 PARLIAMENTARY SUPERANNUATION ACCOUNT... 46 STATEMENT OF ACCOUNTING POLICIES... 47 NOTES TO THE FINANCIAL STATEMENTS... 50 AUDIT REPORT... 58 STATEMENT OF INVESTMENT POLICIES, STANDARDS, AND PROCEDURES... 60 DIRECTORY... 73 2

GOVERNMENT SUPERANNUATION FUND AUTHORITY CHAIRMAN S REPORT I am pleased to present, on behalf of the Government Superannuation Fund Authority Board (the Authority Board), the first report of the Government Superannuation Fund Authority (the Authority). The report covers the period 2 October 2001 to 30 June 2002 and is made in accordance with section 41 of the Public Finance Act 1989. A separate report has been prepared for the Government Superannuation Fund (GSF or the Fund), covering investment performance and GSF Schemes membership, including the financial statements of the Fund. The report on the Fund commences on page 31. The report for the Authority covers the transition of the Fund from the Ministry of Economic Development (the Ministry) to the Authority and the implementation of the new investment policy and structure. The past year has been one of major change for GSF. In August 2001, an amendment to the Government Superannuation Fund Act 1956 transferred responsibility for the GSF to a new Crown Entity, the Authority, with effect from 2 October 2001. The Minister of Finance appointed six members to the Authority Board on 21 August 2001. Driving the change was the Government s desire to improve long-term investment returns and, in doing so, reduce the Government s direct contribution towards funding the cost of GSF benefits. This required a new investment policy, moving away from a fund invested entirely in New Zealand fixed interest securities towards a portfolio diversified in accordance with best practice portfolio management. The Government set up the Government Superannuation Fund Establishment Board (the Establishment Board) in November 2000 to effect the change. The Establishment Board engaged an investment adviser (Frank Russell Company (NZ) Limited) and commissioned an asset/liability study to help determine an investment mix appropriate for the new investment policy. It also began planning management arrangements necessary under the amended legislation. In accordance with its terms of reference, other matters addressed by the Establishment Board were: Management of the process of transferring the management of the Fund and administration of the GSF Schemes from the Ministry to the Authority. Configuration of investment managers and the investment manager search process. The Establishment Board recommended all major management functions be outsourced i.e. investment management, custody and schemes administration, recommendations that were adopted by the Authority. For schemes administration this meant continuing with the existing agreement between National Mutual Corporate Superannuation Services Limited (trading as AXA New Zealand) and the Crown through to its expiry in February 2003. The appointment of investment managers and the custodian, and the management of the transition, are commented on in the section below. The Establishment Board also considered alternatives for the Authority to gain operational efficiencies by sharing resources and expertise with comparable organisations. As a result, a joint venture company, Annuitas Management Limited, 3

was established to provide executive support both for the Board of Trustees of the National Provident Fund and the Authority. On 2 October 2001, the GSF investment portfolio was transferred from the Ministry to the Authority. Its market value at that date was $3.518 billion. At the same time, the responsibilities of the former Superintendent, for administering the GSF Schemes, passed to the Authority. Transition process towards new asset allocation An important initial task for the Authority Board was implementing the transition strategy by moving the GSF assets from predominantly New Zealand Government Stock to the long term strategic asset allocation. This chart compares the actual asset allocation achieved, as at 30 June 2002, against the long term target set by the Authority Board. ASSET ALLOCATION Actual as at 30 June 2002 Long Term Target 30 June 2003 $000 % % NZ fixed interest and cash 1,935,625 59.5 14.0 NZ equities 236,464 7.3 12.5 International equities 1,080,856 33.2 52.5 International fixed interest - - 21.0 3,252,945¹ 100.0 100.0 ¹ Total investments less investment settlements payable. When the Authority assumed responsibility, the Fund held around 10.95% of the total New Zealand Government Stock on issue. The Authority Board recognised a transition of this size and scale had the potential to disrupt the New Zealand dollar, interest rate and domestic equity markets. An over-riding requirement, set by the Authority Board, was for the transition to be executed with minimal impact on those markets. Two processes had to be coordinated to implement the transition: identifying and engaging managers for the investment of, and transition to, the new portfolio of assets, and selling the New Zealand Government Stock portfolio. The Authority Board embarked on a public tender process for the sale of the Fund s holdings of New Zealand Government Stock. The Reserve Bank of New Zealand conducted the tenders in the same manner it carries out regular sales of Government Stock for the Crown. A tender of approximately $150m was held in each of the five months to 30 June 2002, and tenders have been scheduled for each month over the remainder of 2002. The tenders have been well supported by the market. Six investment managers were appointed following a competitive assessment process. That process involved evaluating responses to a request for proposal and interviews with Authority Board representatives. Comprehensive investment management agreements were completed with the selected managers requiring the managers to invest the assets on a prudent commercial basis and in a manner consistent with best practice portfolio management. Also, as part of this process, JP Morgan Chase Bank was appointed as the custodian. 4

The Authority appointed Morgan Stanley Dean Witter Australia Limited as transition manager to purchase foreign currencies and the new assets, and provide transition management advice. Up to 30 June 2002, the transition manager executed the purchase of foreign currencies, international equities, and New Zealand equities in accordance with a transition programme regularly reviewed by the Authority Board. The Authority Board requires the transition manager s activities to have minimal impact on the respective markets and be executed in a manner which maximises value to the Authority. The Authority Board has reviewed the completed purchases and is satisfied its requirements are being met. At 30 June 2002, the Fund had diversified by adding New Zealand equities to the value equivalent to 7.3% of the total Fund, and international equities equivalent to 33.2%. At that date the transition programme was approximately at the halfway point and completion by the target date is on track. Investment returns Details of the investment returns and the benchmark indices used by the Authority are set out in the Investment Commentary section on page 36 of the Annual Report for the Fund. For the year the Fund s pre-tax return was 0.47%, compared with the benchmark index return of 0.74%. For the period 1 July to 1 October 2001, the Fund s return was 3.10% (benchmark index 3.55%). For the period 2 October 2001 to 30 June 2002, the Fund s return was negative 2.55%, 0.16% ahead of the transitional benchmark index set by the Authority Board. On an after tax basis the Fund s return for the year was negative 2.27%. This return compares with the return of the median superannuation scheme, in the Watson Wyatt Investment Performance Survey (covering 109 superannuation schemes) for the year ended 30 June 2002, of negative 4.10%. Because the liabilities of the Fund extend up to 60 years and are only partly funded by the assets, the investment strategy takes a long term view. The Authority has selected the long term asset allocation it considers to be best suited to meet the investment objective. The primary aim is to achieve a substantially improved long term performance while tolerating some shorter term volatility. Over one year, while there is a 65% chance of the return exceeding returns on a portfolio invested entirely in New Zealand Government stock, there is also a chance of around 18% of achieving a negative return. The Authority remains confident it will achieve its long-term objective for the Fund to out perform an equivalent portfolio invested entirely in New Zealand Government Stock. Basil Logan Chairman Government Superannuation Authority Board 5

STATEMENT OF GOVERNANCE AND ACCOUNTABILITY The Government Superannuation Fund Authority (the Authority) was established as a Crown entity by section 15A of the Government Superannuation Fund Amendment Act 2001 (the Amendment Act). The business of the Authority is to manage the assets, and administer the schemes of the Government Superannuation Fund (the Fund) in accordance with the Government Superannuation Fund Act 1956 (the Act). Section 15G of the Amendment Act specifies that the Government Superannuation Fund Authority Board (the Authority Board) is responsible for the business of the Authority. Government Superannuation Fund Authority Board The Minister of Finance appointed the following six members to the Authority Board on 21 August 2001: Basil Logan, Chairman, is the Chairman of Opus International Consultants, and previously Chairman of Prudential Corporation of New Zealand. David May, Deputy Chairman, was formerly Chief Executive of Jacques Martin NZ Ltd and Managing Director of Colonial Life NZ Ltd. He has recently been appointed Chairman of the Guardians of New Zealand Superannuation, and a director of Southern Cross Healthcare. Colin Blair OBE, is the Retirement Commissioner, and a member of the Board of Trustees of the National Provident Fund. He was formerly a Partner of the accounting firm Deloitte Touche Tohmatsu. Helen Bowie is a partner of Chapman Tripp Sheffield Young. Tim McGuinness previously held the senior investment positions at Norwich Union Investment Management and Royal Sun Alliance. He is currently a Board member of the Earthquake Commission, member of the Stock Exchange Surveillance Panel, and sits on the Investment Committee of the Global Retirement Trust. Susie Weaver is a principal of Weaver Consulting Ltd and former General Manager of Investments at Armstrong Jones. All members, except for Colin Blair and Susie Weaver, had served on the Government Superannuation Fund Establishment Board on preparation work for the Authority. New Board Member On 1 July 2002, the Minister of Finance appointed Ralph Stockdill as a member of the Authority Board. Until his retirement on 31 March 2001, Mr Stockdill had been with the Department of Labour for 40 years, including 23 years in senior management positions in the employment relations area. Immediately before his appointment to the Board, he was a member of the Executive of the Government Superannuitants Association. 6

Responsibilities and Operations of the Board The Board is responsible for all decisions relating to the business of the Authority. The Board has established three committees with specific responsibilities for Audit, Investments, and Schemes. As required by the Act, the Board does not delegate the following powers: the power of delegation; the power to grant power of attorney; and the power to appoint scheme administration managers, investment managers, other service providers and custodians. The Board held meetings at least once a month during the period. Auditor The Auditor-General is the auditor of the Authority. The Auditor-General has appointed Mr G R Mitchell of Deloitte Touche Tohmatsu to act on his behalf. Management Team The Authority and the Board of Trustees of the National Provident Fund (NPF) have formed a joint venture company, Annuitas Management Limited (Annuitas), to provide secretarial and executive support to both organisations. Services are provided to the Authority and NPF by Annuitas in accordance with management services agreements. The agreement between Annuitas and the Authority contains delegations of authority to enable Annuitas to carry out the day to day management of the Authority s investment and schemes management arrangements. In the case of schemes management, the delegation includes interpretation of the provisions of the GSF schemes and exercise of discretionary powers in accordance with the published policies, subject to appropriate consultation with the Authority Board. The Management team of Annuitas is: Alan Langford Dick Fernyhough Denise Healey Hunter Donaldson Chief Executive Financial Controller General Manager, Investments Manager, Schemes 7

STATEMENT OF RESPONSIBILITY The financial statements of the Government Superannuation Fund Authority (the Authority) for the period from 2 October 2001 to 30 June 2002 have been prepared in accordance with section 41 of the Public Finance Act 1989. The Government Superannuation Fund Authority Board (the Authority Board) is responsible for the preparation of the financial statements, and the judgements made in the process of producing those statements. The Authority Board confirms that internal control systems have been established and maintained during the period to assure reasonable reliability and integrity of financial and non financial reporting. In our opinion the attached financial statements and reports for the Authority fairly reflect the financial position as at 30 June 2002, and the financial performance and the cash flows of the Authority for the period from 2 October 2001 to 30 June 2002. Basil Logan Chairman Government Superannuation Fund Authority Board Alan Langford Chief Executive Annuitas Management Limited 7 October 2002 8

STATEMENT OF SERVICE PERFORMANCE Output Class O1 Management of the Government Superannuation Fund This output class provides schemes management, and investment management, services for the Government Superannuation Fund (GSF or the Fund). Outputs in this class are: management of the GSF assets; interpretation of the provisions of the Government Superannuation Fund Act 1956 (the Act), and exercising the statutory powers under the Act; management of the GSF Schemes, including the agreement between the Crown and the Administrator of the GSF schemes; and overall financial management of the Fund, including reporting on its liabilities and the Crown s financial obligation to the Fund. The performance targets are set out in the Government Superannuation Fund Authority s Interim Statement of Intent 2001/2002 Investment Management Planning PERFORMANCE TARGET Development of an investment strategy for the Fund to be agreed with the Minister by 2 October 2001 PERFORMANCE ACHIEVED Achieved Development of a strategic asset allocation for the Fund to be determined by 2 October 2001 Achieved Development of investment manager configuration and investment transition plan to be completed by 2 October 2001 Achieved Establishment of investment policies, standards and procedures (including sub sections (a) to (k) of section 15m of the Act) - by 30 June 2002 Achieved, except for international fixed interest. The Fund did not invest in this asset class during the period under review. 9

Ethical Policies PERFORMANCE TARGET Establishment of ethical investment policies interim policies to be established by 2 October 2001. These will be further developed during the year. PERFORMANCE ACHIEVED Interim policies were established by 2 October 2001, and included in the Statement of Investment Policies and Objectives. Substantial further research on the development of these policies was completed in June 2002. 10

Implementation PERFORMANCE TARGET PERFORMANCE ACHIEVED Appointment of Custodian by 2 October 2001 Appointment of Investment Managers See below JP Morgan Chase Bank appointed 20 September 2001. Asset Class Target Manager Appointment Date Manager Date of Appointment NZ Fixed Interest (residual portfolio passive management) 2 October 2001 AMP Henderson Global Investors New Zealand Ltd 2 October 2001 First International equities (passive management) 15 October 2001 AMP Henderson Global Investors New Zealand Ltd 16 November 2001 NZ Fixed Interest two managers (active management) 15 October 2001 AMP Henderson Global Investors New Zealand Ltd Alliance Capital Management New Zealand Ltd 2 October 2001 24 October 2001 NZ Equities two managers (active management) 31 October 2001 BT Funds Management (NZ) Ltd Tower Asset Management Ltd 26 October 2001 31 October 2001 Transition Manager 31 October 2001 Morgan Stanley Dean Witter Australia Ltd 16 October 2001 Currency Manager 28 February 2002 State Street Global Advisors, Australia Limited 11 April 2002 Second International Equities (passive management) 15 March 2002 Bank of New Zealand Investment Management 18 February 2002 11

PERFORMANCE TARGET Funds to be transferred to Custodian by 2 October 2001 Establishment of Tender programme to sell down the residual GSF portfolio by 31 January 2002. Government bonds will be sold to achieve the target asset allocation during the period 31 January 2002 to 30 June 2003 Implementation of the following asset allocation - by 30 June 2003. PERFORMANCE ACHIEVED Achieved Tender programme established and outlined in an Information Memorandum dated 18 January 2002. Five tenders held, in the period to 30 June 2002, for a total of $750 million of Government Bonds. See table below PERFORMANCE TARGET New Zealand Fixed Interest New Zealand Equities International Equities International Fixed Interest Target Asset Allocation by 30 June 2003 % Expected Asset Allocation by 30 June 2002 % Actual 30 June 2002 % 14.0 47.0 40.3 12.5 9.0 7.3 52.5 44.0 33.2 21.0 0.0 0.0 Cash 0.0 0.0 19.2 Total 100.0% 100.0% 100.0% PERFORMANCE TARGET PERFORMANCE ACHIEVED Implementation of joint venture with NPF to be completed by 2 October 2001 Achieved 12

Schemes Management PERFORMANCE TARGET PERFORMANCE ACHIEVED Schemes Administration Manager performance to be monitored, and maintained, in accordance with the requirements of the Management Agreement between the Crown and AXA New Zealand. The Schemes Administration Manager delivered the services required by the Management Agreement. Service delivery was certified quarterly by the Schemes Administration Manager, as required by the Agreement. The Statement of Provisions, Policies and Procedures to be maintained, and amended to record policy changes made by the Authority. No changes were required or made to the Statement of Provisions, Policies and Procedures, which was published by the then Superintendent of the Fund on 28 September 2001. Submissions from the Schemes Administration Manager to be dealt with in accordance with the Act and the published policies. All submissions to be responded to within 5 working days. All schemes decisions were made in accordance with the Act and the published policies. The 186 submissions from the Schemes Administration Manager were responded to within 5 working days. Appeals against decisions made by or on behalf of the Authority to be responded to in accordance with the Act. The Authority s report to the Appeals Board to be provided at least 14 days before each scheduled hearing date. The eight appeals made during the period were reported on to the Appeals Board at least 14 days before scheduled hearings. Sufficient funding to be provided to the Schemes Administration Manager to ensure all benefit payments are able to be made as they become due. Sufficient funding to meet benefit payments was provided to the Schemes Administration Manager by the due dates. 13

PERFORMANCE TARGET PERFORMANCE ACHIEVED Actuarial data on the Fund, required for the Crown accounts, to be provided in accordance with the timetable agreed with Treasury. Actuarial data required for the Crown accounts was provided to Treasury by the agreed dates. Review to be undertaken of the robustness and sustainability of the GSF Schemes Administration IT Systems by 31 March 2002. The review of the robustness and sustainability of the GSF Schemes Administration IT systems in the medium term was completed in March 2002. Strategy to be developed for administration of the GSF Schemes from 1 March 2003 after the AXA New Zealand contract expires by 31 May 2002 The Authority determined that its strategy for the administration of the GSF Schemes would be to negotiate a rollover of the existing contract for at least a two year term. The extension is intended to provide time to develop a strategy to ensure that there is a stable long-term schemes administration arrangement, which takes into account: The scope for economies from a degree of consolidation with the National Provident Fund schemes administration. The need for an arrangement which is sustainable for a long period. The need to update and maintain the IT system in the long term. 14

GOVERNMENT SUPERANNUATION FUND AUTHORITY STATEMENT OF FINANCIAL PERFORMANCE FOR THE PERIOD FROM 2 OCTOBER 2001 TO 30 JUNE 2002 2002 2002 Notes $000 $000 Actual Forecast Revenue Interest received 10 5 Other revenue 501 730 Transfer from the Government Superannuation Fund 1 6,323 8,556 Total Revenue 6,834 9,291 Expenses Schemes administration 2,287 2,288 Investment management 2 2,349 4,821 Operating 3 2,198 2,182 Total Expenses 6,834 9,291 Net operating result - - This statement is to be read in conjunction with the Statement of Accounting Policies and the Notes to the Financial Statements. 15

GOVERNMENT SUPERANNUATION FUND AUTHORITY STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2002 2002 2002 Notes $000 $000 Actual Forecast Public equity General fund 10 287 - Total public equity 287 - Represented by: Current assets Cash at bank 798 20 Short-term investments - 180 Receivables and prepayments 4 1,209 50 Total current assets 2,007 250 Current liabilities Payables 5 1,720 250 Total current liabilities 1,720 250 Net assets 287 - The Financial Statements were approved by the Government Superannuation Fund Authority Board on 7 October 2002 Basil Logan Chairman Government Superannuation Fund Authority Board Colin Blair Chairman Audit Committee Government Superannuation Fund Authority Board This statement is to be read in conjunction with the Statement of Accounting Policies and the Notes to the Financial Statements. 16

GOVERNMENT SUPERANNUATION FUND AUTHORITY STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 2 OCTOBER 2001 TO 30 JUNE 2002 2002 2002 $000 $000 Actual Forecast Cash flows from operating activities Cash was provided from: Government Superannuation Fund 5,145 8,556 Interest 10 5 Other 656 710 5,811 9,271 Cash was disbursed to: Operating expenses (5,294) (9,251) (5,294) (9,251) Net Cash flows from operating activities 517 20 Cash flows from investing activities Cash was provided from: Ministry of Economic Development - 193 Sale of fixed assets 50 46 Cash was disbursed to: Purchase of securities - (180) Contribution to the Government Superannuation Fund - (59) Net Cash flows from investing activities 50 - Cash flows from financing activities Cash was provided from: Ministry of Economic Development 101 - Capital contribution from the Crown 130 - Net Cash flows from financing activities 231 - Net increase in cash held 798 20 Opening cash brought forward - - Closing cash balance 798 20 This statement is to be read in conjunction with the Statement of Accounting Policies and the Notes to the Financial Statements. 17

STATEMENT OF CASH FLOWS FOR THE PERIOD FROM 2 OCTOBER 2001 TO 30 JUNE 2002 - Continued Reconciliation of Net Operating Result to Net Operating Cash Flows 2002 2002 $000 $000 Actual Forecast Net operating result - - Movements in Working Capital items Receivables and prepayments (1,209) (50) Payables 1,720 250 511 200 Items classified as investing activities Loss on sale of fixed assets Purchase of investments 6 - - (180) Net cash flows from operating activities 517 20 GOVERNMENT SUPERANNUATION FUND AUTHORITY STATEMENT OF MOVEMENT IN PUBLIC EQUITY FOR THE PERIOD FROM 2 OCTOBER 2001 TO 30 JUNE 2002 2002 2002 $000 $000 Actual Forecast Public equity at beginning of the period - - Net operating result - - Total recognised revenues and expenses for the period - - Capital contribution from the Crown 130 - Assets transferred from the Ministry of Economic Development 157-287 - Public equity as at 30 June 2002 287 - These statements are to be read in conjunction with the Statement of Accounting Policies and the Notes to the Financial Statements. 18

GOVERNMENT SUPERANNUATION FUND AUTHORITY STATEMENT OF COMMITMENTS AS AT 30 JUNE 2002 Section 22 of the Government Superannuation Fund Authority Amendment Act 2001 ( the Amendment Act ) vests in the Authority the whole of the leasehold interest in floors 3 and 4 at 33 Bowen Street, Wellington (the Bowen space). The lease terminates in February 2009. The annual lease payment is subject to three-yearly reviews. The amounts disclosed below as future commitments are based on current rental rates. The Authority has entered into sub leases with the Ministry of Economic Development (MED) and ACC for the Bowen space. The MED lease is on a month to month basis. The ACC lease of level 3 is to 31 May 2005, and for level 4 to 31 May 2003 with two rights of renewal for one year terms to 31 May 2005. In terms of section 15E (1) of the Amendment Act, the Authority s expenses are reimbursed by the Government Superannuation Fund, which recovers them from the Crown, as provided for in section 95 of the Government Superannuation Fund Act 1956, and from other employers. Accordingly, any shortfall between the lease commitments and the sub-lease revenue is not onerous to the Authority. Other operating commitments include non-cancellable contracts for building services. 2002 2002 $000 $000 Actual Forecast Capital commitments approved and contracted - - Non-cancellable operating commitments Accommodation lease 3,467 3,467 Other operating commitments 1,233 1,233 Total operating commitments payable (as detailed below) 4,700 4,700 Term classification for accommodation lease commitments Not later than one year 520 520 Later than one year and not later than two years 520 520 Later than two years and not later than five years 1,560 1,560 Later than five years 867 867 Total lease commitments 3,467 3,467 Term classification for other operating commitments Not later than one year 185 185 Later than one year and not later than two years 185 185 Later than two years and not later than five years 555 555 Later than five years 308 308 Total other operating commitments 1,233 1,233 These statements are to be read in conjunction with the Statement of Accounting Policies and Notes to the Financial Statements. 19

STATEMENT OF COMMITMENTS AS AT 30 JUNE 2002 Continued The Crown has contracted National Mutual Corporate Superannuation Services Limited (trading as AXA New Zealand) at $3.050 million per annum to administer the schemes of the Government Superannuation Fund. The agreement expires on 28 February 2003. In terms of section 22 of the Amendment Act, this agreement was also vested in the Authority. 2002 2002 $000 $000 Actual Forecast Non-cancellable contractual commitments Schemes administration not later than one year 2,033 2,033 Total non-cancellable contractual commitments payable 2,033 2,033 GOVERNMENT SUPERANNUATION FUND AUTHORITY STATEMENT OF CONTINGENT LIABILITIES AS AT 30 JUNE 2002 There were no contingent liabilities as at 30 June 2002. These statements are to be read in conjunction with the Statement of Accounting Policies and Notes to the Financial Statements. 20

STATEMENT OF ACCOUNTING POLICIES (i) Reporting entity and statutory base The Government Superannuation Fund Authority (the Authority) is a Crown entity in terms of the Public Finance Act 1989 and was established by section 15A of the Government Superannuation Fund Amendment Act 2001 (the Amendment Act). The core business of the Authority is to manage the assets, and administer the schemes of the Government Superannuation Fund (the Fund). These financial statements have been prepared in accordance with section 41 of the Public Finance Act 1989. A separate financial report has been prepared for the Fund in terms of section 93 of the Government Superannuation Fund Act 1956 (the Act). (ii) Measurement base The financial statements are prepared on the historical cost basis. The reporting currency is in New Zealand dollars. (iii) Particular accounting policies The following particular accounting policies, which materially affect the measurement of financial performance, financial position, and cash flows, have been consistently applied: (a) Forecast figures The forecast figures are those approved by the Government Superannuation Fund Authority Board (the Board) at the beginning of the period and presented in the Interim Statement of Intent. The forecast figures have been prepared in accordance with generally accepted accounting practice, and are consistent with the accounting policies adopted by the Board for the preparation of the financial statements. (b) Goods and services tax (GST) The Authority makes principally exempt supplies for GST purposes as it manages superannuation schemes. Apart from GST on transactions relating to the lease of levels 3 and 4 of 33 Bowen Street, Wellington, which are recoverable as input tax, GST is included in expenditures. (c) Taxation The Authority is classified as a public authority in terms of the Income Tax Act 1994 and consequently is exempt from income tax. (d) Statement of cash flows The statement of cash flows has been prepared using the direct approach. 21

- Cash and cash equivalents Cash and cash equivalents consist of current accounts in banks used in the day-to-day cash management of the activities of the Authority, and are unconditionally convertible to cash within two working days. - Operating activities Operating activities include all receipts of revenues and investment income, and payments of expenses. - Investing activities Investing activities relate to the acquisition, holding, and disposal of investments. - Financing activities Financing activities relate to changes in equity capital structure. (e) Operating leases Leases where the lessor effectively retains substantially all the risks and benefits of ownership of the leased items are classified as operating leases. Payments under these leases are recognised as expenses in the periods in which they are incurred. (f) Financial instruments The Authority is party to financial instruments as part of its normal operations. These financial instruments include bank accounts, debtors, and creditors. All financial instruments are recognised in the Statement of Financial Position. All revenues and expenses in relation to financial instruments are recognised in the Statement of Financial Performance. All financial instruments are shown at their estimated fair values. (g) Accounting for Joint Ventures From 2 October 2001, the Authority and the Board of Trustees of the National Provident Fund (NPF) formed a joint venture company, Annuitas Management Limited (Annuitas), to provide secretarial and executive support under contracts with both organisations. The Authority has a 50% ownership in Annuitas, but does not equity account for Annuitas as this is deemed to be immaterial. (iv) Reporting Period The reporting period is the period from 2 October 2001 to 30 June 2002. (v) Changes in accounting policy As the Authority was established as a Crown entity on 2 October 2001, this is the first report, and there are no comparative figures. 22

NOTES TO THE FINANCIAL STATEMENTS FOR THE PERIOD FROM 2 OCTOBER 2001 TO 30 JUNE 2002 1 Transfer from the Government Superannuation Fund (the Fund) In terms of section 15E (1) of the Amendment Act, the administrative expenses of the Authority, including fund management fees and custodian fees, are paid out of the Fund. Both the Crown and other employers reimburse the Fund under section 95 of the Act for the Authority s expenses. In the reporting period, the Crown contributed 90% of the Authority s expenses, and other employers contributed the balance of 10%. 2 Investment Management 2002 $000 Custodian fees 502 Funds management fees 1,847 Total 2,349 The forecast expenses for investment management were revised in April 2002 from $4.821 million to $2.654 million as a result of a slower diversification programme than originally planned for the period. 3 Operating 2002 $000 Accommodation 549 Professional services Accounting 41 Actuarial 21 Audit 125 Investment management advice 157 Legal 222 Taxation 57 Board fees and expenses 105 Executive services 755 Other 166 Total 2,198 23

4 Receivables and Prepayments 2002 $000 Receivables Government Superannuation Fund 1,178 GST refund receivable 8 Prepayments Annuitas Management Limited 23 Total receivables and prepayments 1,209 5 Payables 2002 $000 Investment management 997 Professional services 122 Trade creditors 185 Other creditors 416 Total payables 1,720 6 Financial Instruments (a) Credit Risk Credit risk is the risk that a third party will default on its obligation to the Authority. Financial instruments, which potentially subject the Authority to risk, consist principally of cash and trade receivables. The Authority has a minimal credit risk in its holdings of cash, bank deposits, and receivables. The Authority does not require any collateral or security to support financial instruments. There is no significant concentration of credit risk. The maximum amount of credit risk for each class is the carrying amount in the Statement of Financial Position (b) Currency Risks Currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Authority has no exposure to currency risk. 24

(c) Interest Rate Risk Interest rate risk is the risk that the value of a financial instrument will fluctuate due to changes in market interest rates. All funds are held on deposits in New Zealand dollars in a trading bank account. (d) Fair Values The fair values of financial instruments are equivalent to the carrying amounts disclosed on the Statement of Financial Position. 7 Employee Remuneration Annuitas Management Limited (Annuitas), a joint venture company formed by the Authority and the Board of Trustees of National Provident Fund (NPF), provides executive and secretarial support under contracts to both organisations. The Authority has no employees. 8 Board Fees Board members were paid the following fees during the period. Chair Basil Logan 25,422 Deputy Chair David May 18,045 Members Colin Blair 12,711 Helen Bowie 12,711 Tim McGuinness 13,278 Susie Weaver 14,696 The Authority also met Board members travel expenses, where applicable, to attend Board meetings. $ 25

9 Related Party Information The Authority is a Crown entity. Section 23 of the Amendment Act appointed the Authority to be the Minister s agent in relation to the contract with National Mutual Corporate Superannuation Services Limited (trading as AXA New Zealand) as the administration manager of the schemes. The Authority has entered into various transactions with Government Departments, and Crown organisations on an arm s length basis in the normal course of business. These transactions are not considered to be related party transactions, except for the following: Fixed assets, independently valued at $38,122 were sold back to the Ministry of Economic Development. Fixed assets, independently valued at $12,090, were sold to the Global Asset Trust, a superannuation scheme administered by the Board of Trustees of National Provident Fund (NPF) Colin Blair (Board member) is a member of the Board of Trustees of the National Provident Fund. During the reporting period, the Authority paid Annuitas $639,000 for executive and secretarial services. 10 Events after Balance Date The following event has occurred between the balance date and the signing of the financial statements, but does not affect the reported results in those statements. Repayment of Public Equity As the Authority is able to recover all its expenses from the Fund, and does not, therefore, need any equity, the Board resolved, subsequent to balance date, to repay the public equity to the Crown. Payment was made on 8 August 2002. 26

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DIRECTORY Executive Office: Annuitas Management Limited Level 16, 95 Customhouse Quay PO Box 3390 Wellington Investment adviser: Frank Russell Company (NZ) Ltd 135 Albert Street PO Box 105-191 Auckland Tax adviser: PricewaterhouseCoopers 113-119 The Terrace PO Box 245 Wellington Solicitors: Phillips Fox 50-64 Customhouse Quay PO Box 2791 Wellington Crown Law Office 45 Pipitea Street PO Box 5012 Wellington Banker: Bank of New Zealand Auditors: Deloitte Touche Tohmatsu on behalf of The Controller and Auditor-General PO Box 1990 Wellington 29

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GOVERNMENT SUPERANNUATION FUND AUTHORITY S REPORT On behalf of the Government Superannuation Fund Authority (the Authority) I have pleasure in presenting this report on the Government Superannuation Fund (the Fund or GSF) for the year ended 30 June 2002. The report is made in accordance with section 93B of the Government Superannuation Fund Act 1956. The Government Superannuation Fund Amendment Act 2001 (the Amendment Act) made major changes to the governance arrangements for the Fund, and to the basis on which the Fund s investments are made. Governance The Authority was established as a Crown entity by Section 15A of the Amendment Act. The business of the Authority is to manage the assets and administer the GSF Schemes in accordance with the Government Superannuation Fund Act 1956 (the Act). Section 15G of the Amendment Act specifies the Government Superannuation Fund Authority Board (the Authority Board) is responsible for the business of the Authority. The Minister of Finance (the Minister) has appointed seven members to the Board. Appointed 21 August 2001: Basil Logan, Chairman David May, Deputy Chairman Colin Blair, OBE Helen Bowie Tim McGuinness Susie Weaver Appointed 1 July 2002: Ralph Stockdill The Fund was managed within the Ministry of Economic Development (the Ministry) from 1 July 2001 to 1 October 2001. The Authority assumed responsibility for the management of the Fund on 2 October 2001. The Authority and the Board of Trustees of the National Provident Fund have established Annuitas Management Limited (Annuitas) to provide secretariat and executive services to both organisations. 31

Also on 2 October 2001, responsibility for interpreting the GSF Schemes provisions of the Act, and exercising discretionary provisions relating to the Schemes, was transferred from the Superintendent to the Authority. Annuitas carries out these functions under delegation from the Authority. The published policies under which these functions are carried out remain unchanged. In the event any changes to the Schemes policies are called for, the Authority is required to consult with interested parties, and then republish the policies. The only change to the Government Superannuation Appeals Board is administrative. The Treasury now provides secretariat and support services. This ensures these services are provided independently from the decision subject to appeal. Schemes Administration In terms of Section 23 of the Amendment Act the Authority was appointed to act as the Minister s agent with respect to the schemes administration agreement between National Mutual Corporate Superannuation Services Limited (trading as AXA New Zealand) (AXA) and the Crown. AXA, under the supervision of the Authority, continues to administer the GSF schemes. The agreement with AXA is due to expire on 28 February 2003. To ensure reliable administration services are maintained during this time of change, the Authority, subsequent to balance date, has renewed the agreement with AXA to 30 April 2005. This is an interim measure while the Authority plans a long-term strategy for schemes administration. Investments The Amendment Act requires the Fund s investments to be made on a prudent commercial basis, consistent with best practice portfolio management. The Authority Board is implementing an investment strategy and asset allocation which reflects these requirements. Details of the target asset allocation, progress in its implementation, and investment results for the year are included in the Investment Commentary of this report on page 36. In recognition of the difficulties in timing entry into the markets, the implementation of the target asset allocation has been spread over time. The allocations to international and New Zealand equities has been progressing since November 2001. The full transition, including investment into international fixed interest, is targeted to be completed by June 2003. For the year the Fund s pre-tax return was 0.47%, compared with the benchmark index return of 0.74%. For the period 1 July to 1 October 2001, the Fund s return was 3.10% (benchmark index 3.55%). For the period 2 October 2001 to 30 June 2002, the Fund s return was negative 2.55%, 0.16% ahead of the transitional benchmark index set by the Authority Board. On an after tax basis the Fund s return for the year was negative 2.27%. This return compares with the return of the median superannuation scheme, in the Watson Wyatt Investment Performance Survey (covering 109 superannuation schemes) for the year ended 30 June 2002, of negative 4.10%. 32

The returns from the Fund s investments have been generally in line with the relevant benchmark indices. International equities were the poorest performing asset class while New Zealand shares generated a small positive return. During the year the Morgan Stanley Capital International World Equities Index declined by approximately 30%. As at 30 June 2002 the index was at the same level as it was in August 1998. This decline highlights the extraordinary nature of investment markets in the year under review. Because the liabilities of the Fund extend up to 60 years and are only partly funded by the assets, the investment strategy takes a long term view. The Authority has selected the long term asset allocation it considers to be best suited to meet the investment objective. The primary aim is to achieve a substantially improved long term performance while tolerating some shorter term volatility. Over one year, while there is a 65% chance of the return exceeding returns on a portfolio invested entirely in New Zealand Government stock, there is also a chance of around 18% of achieving a negative return. The Authority remains confident it will achieve its long-term objective for the Fund to out perform an equivalent portfolio invested entirely in New Zealand Government Stock. The Authority Board will regularly review its strategy to ensure it remains appropriate and consistent with legislative requirements. Membership Although the Fund was closed to new members in June 1992 and the Pacific Island sub schemes closed on 22 October 1995, the Fund will continue to have a very substantial membership for many years. As at 30 June 2002, there were 26,990 contributors to the Fund and 47,474 annuitants, a total of 74,464 members. Further details are set out in the Membership Commentary see page 39. Mortgage Finance No new mortgages are being granted. The GSF mortgage portfolio as at 30 June 2002 was 41 mortgages totalling $0.9 million (30 June 2001: 64 mortgages totalling $1.849 million), with an average earning rate of 3.45% for the period (30 June 2001: 5.02 %) after tax and mortgage administration charges. Basil Logan Chairman Government Superannuation Authority Board 33

REGULATORY STATEMENT In accordance with the Superannuation Schemes Act 1989 the Authority states that to the best of its knowledge and belief, for the financial year ended 30 June 2002, i ii all contributions required to be made to the Fund under the Government Superannuation Fund Act 1956 have been made or accrued. all benefits required to be paid from the Fund under the Government Superannuation Fund Act 1956 have been paid. iii due to the unfunded nature of the schemes, the market value of assets did not match the accrued benefit liability of the Fund by $8,921 million (2001: $8,481 million). The deficiency is covered by section 95 of the Act which requires the Minister of Finance to appropriate funds from Public Money to meet the annual deficiency in payments from the Fund. iv more than 10 percent of the market value of assets was invested in securities issued by the New Zealand Government, which is an employer with an interest in the schemes. At 30 June 2002 the Fund held New Zealand Government securities with a market value of $1,480 million (including $310.554 million which will mature during the next twelve months). v all employer contributions paid were in accordance with the most recent recommendation of the Government Actuary. Basil Logan On behalf of the Government Superannuation Fund Authority 7 October 2002 34

STATEMENT OF RESPONSIBILITY The financial statements of the Government Superannuation Fund (the Fund) for the year ended 30 June 2002 have been prepared in accordance with section 93 of the Government Superannuation Fund Act 1956. The Government Superannuation Fund Authority (the Authority) is responsible for the preparation of the financial statements and the judgements made in the process of producing those statements. The Authority confirms that: Internal control systems have been established and maintained during the year to assure reasonable reliability and integrity of these financial statements. The investment policies, standards, and procedures for the Fund, on pages 60 to 72, have been complied with. In our opinion the attached financial statements and reports fairly reflect the net assets as at 30 June 2002 and the changes in net assets and the cash flows of the Fund for the year ended 30 June 2002. Basil Logan On behalf of the Government Superannuation Fund Authority Alan Langford Chief Executive Annuitas Management Limited 7 October 2002 35

INVESTMENT COMMENTARY Transition Progress From an initial portfolio (excluding mortgages) made up of 100% of New Zealand fixed interest securities and cash (Government Stock accounted for 85%), as at 30 June 2001, the Fund has diversified by adding $236 million of New Zealand equities, and $1,081 million of International equities to its portfolio. This has been achieved by a gradual sell down of New Zealand Government Stock through a carefully managed tender programme (managed by the Reserve Bank as the Authority s agent) and the purchase of equities. As at 30 June 2002, the transition toward the target asset allocation was approximately 50% completed. The transition should be achieved by the scheduled completion date of June 2003. Asset Allocation Actual as at Expected Long Term 30 June 2002 30/6/02 Target $000 % % % NZ fixed interest and cash 1,935,625 59.5 47.0 14.0 NZ equities 236,464 7.3 9.0 12.5 International equities 1,080,856 33.2 44.0 52.5 International fixed interest - - - 21.0 3,252,945¹ 100.0 100.0 100.0 ¹ Total investments less investment settlements payable. Investment Performance The Fund returns for the period 1 July to 1 October 2001, when the Fund was managed by the Ministry of Economic Development, and for the period from 2 October 2001 to 30 June 2002 are set out in the table below. Investment Returns Pre-Tax Fund % Benchmark Index % Notes 1 July 2001 1 October 2001 3.10 3.55 ¹ 2 October 2001-30 June 2002 (2.55) (2.71) ² Year Ended 30 June 2002 0.47 0.74 ³ ¹ CSFB Government Stock Gross Return Index ² See comment in paragraph below ³ Index calculated by combining returns from the indices above Once the transition period is complete, the performance of the Fund will be assessed by comparing the Fund return (after tax) with the CSFB Government Stock Gross Return Index (after tax) plus 3% per annum over rolling ten year periods. In the interim, a transition benchmark index has been adopted, which applied for the period 2 October 2001 to 30 June 2002. This benchmark is the weighted average of the indices in each 36

asset class, adjusted for cash flows occurring during the month. Fund performance, measured on this basis was marginally ahead of the benchmark index. Overall, investment markets have been volatile over the year. Following the initial decline in international equity prices in the wake of September 11, prices partially recovered then further suffered from a slump in investor confidence. New Zealand shares generated a positive return during this period as the economy experienced rising business and consumer confidence, a competitive exchange rate and a relatively strong company earnings outlook. An analysis of, and commentary on, the returns from each asset class against the benchmark follow. New Zealand Cash 3.86% (for period from 2/10/01 to 30/6/02) The CSFB 90 day Bank Bill Index return was 3.91% for the same period Short-term interest rates in New Zealand are largely guided by the Reserve Bank (RBNZ) Official Cash Rate (OCR). The RBNZ alters the OCR in response to anticipated changes in the inflation rate. From a level of 5.25% in October, the OCR was reduced to 4.75% in November, in line with the trend set by central banks globally to boost investor confidence and stimulate economic growth in the wake of the events of September 11. In each of March, April and May, with emerging signs of a global economic recovery, and against a backdrop of a relatively robust domestic economy, the RBNZ then increased the OCR by 0.25% to end the period at 5.50%. New Zealand Fixed Interest 6.63% (for period from 1/7/01 to 30/6/02) The CSFB Government Stock Gross Return Index return was 7.06% for the same period. Returns from fixed interest investments are a combination of interest income and capital gains or losses as market interest rates fall (generating gains) or rise (generating losses). Interest rates in New Zealand are influenced by both domestic and global factors. Fixed interest markets were reasonably volatile over the period. Initially, yields fell (resulting in capital gains) as weak global economic data increased the prospect of further interest rate cuts in the near term. Investors then began to anticipate a turnaround in the global economy and yields rose. Overall, the 10-year bond rate increased over the period from 6.47% to 6.65%. New Zealand Equities 0.63% (for period from 20/12/01, when the Fund first invested in New Zealand equities, to 30/6/02) The Russell/JB Were Index return was 1.81% The New Zealand equities market significantly outperformed its global counterparts over the period. Initially, domestic shares experienced modest appreciation, in line with most world markets. The New Zealand market was then able to hold onto these gains, despite global shares falling on the back of a slump in investor confidence. 37