apr-11.pdf (2.07 MB) - Crown Ownership Monitoring Unit

It is not clear whether the level of discretionary risk taken by each CFI is optimal. However,with the size of the CFI portfolio (in terms of assets and liabilities) forecast to grow overtime, the Government will continue to monitor the level of discretionary risk being borneacross the CFI portfolio, and maintain comfort as the Crown balance sheet changes....relative to the sensitivity of CFI liabilities to changing economicconditionsThe present value of the liabilities of each CFI is sensitive to changes in economicconditions, in particular interest rates and inflation. By holding long-term incomeassets that will tend to appreciate in value when real interest rates decline (increasingthe present value of future obligations), CFIs can reduce the risk of a significantdeterioration in the funding gap between assets and liabilities. This in turn minimisesthe year-on-year impact on the Crown accounts by reducing the volatility of therespective net surplus/deficit between the assets and liabilities.The Crown’s biggest liability exposures within the CFI portfolio lie with ACC and thelevels of funding expected to be met by NZSF. For ACC, with a target of full funding by2018/19 (in the accounts which are funded by levies), if a high level of correlation canbe achieved between the assets and liabilities of the Fund then the year-on-year impactof changes in the net surplus/deficit should be limited, irrespective of the growth in thesize of ACC’s assets. With respect to NZSF, the Government will continue to monitorwhether the discretionary risk being taken is appropriate in the context of the longdatedfunding profile that has been set for the Fund.As the funding gap between assets and liabilities closes we would expect to see thelevel of discretionary risk taken within the CFI portfolio reduce over time.ConclusionsAs the CFI portfolio grows as a proportion of the Crown’s balance sheet the associatedasset risk will increase. CFIs have taken on some discretionary investment risk relativeto their liabilities with the expectation of achieving additional returns in compensationfor the additional risk. Any additional return achieved over time will reduce the overallcommitment required from the Crown to meet its future obligations as they fall due.The size and composition of the resulting risk remains an important area to monitorwith an underlying aim of trying to ensure that falling asset values do not unduly add togeneral financial stress in any future financial crisis.page | 47