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Year Ended 30 June 2016

The Fund had below average return on investments for the year of 2.1% before tax and after investment fees. This compares to a gross return on the Fund of 2.8% before tax and expenses. The Fund's return was 0.2% behind the
Reference Portfolio and well below the 8.0% return on New Zealand Government Stock in 2016. However over the last 3 years the Fund investment return averaged 9.8% per annum (pa), 0.3% pa ahead of the Reference Portfolio and 3.5%
pa above New Zealand Government Stock and over the last 10 years, which spans the global financial crisis, the Fund investment return was 5.9% pa, the same as the Reference Portfolio and behind 6.5% pa for New Zealand Government Stock.

Table 1: Investment Performance

Year ended
30 June 2016
($ million)
Year ended
30 June 2015
($ million)
Surplus before tax  60.8469.2
Less income tax expense (73.5)  41.3
Surplus after tax (12.7)510.6

Investment Returns

Investment returns were somewhat under par in the 2016 financial year. Although global bond returns exceeded normal levels international equities had negative returns. The economic backdrop to these returns was characterised by weak global growth and repeated attempts by monetary authorities to forestall a recession. Markets fluctuated sharply at
times and investors' risk aversion mounted as these attempts appeared to be unsuccessful in lifting global growth. Investors sought safety in government bonds and equities with stable yields, benefiting the New Zealand share market in particular. New Zealand equities had a very strong year, standing out from the global pack.

The Fund return on investments for the June year was a below average 2.1% (before tax and after investment fees).Over the last 3 years the Fund returned 9.8% per annum net of investment fees. The comparative return for the same period
for the Reference Portfolio is 9.5% per annum and for New Zealand Government Stock is 6.3% per annum.

The key driver of poor returns this year was the decline in global equity markets, the Fund’s largest exposure. Global equity returns were -3.2% in local currency terms but -8.7% if not hedged into New Zealand dollars. In contrast, New Zealand Government Stock returned 8.0% as investors deserted equities in favour of the safety of government bonds.

This modest added value was not enough to cover additional investment fees, however, resulting in 0.2% underperformance net of fees. Although significant value was added in equities and tactical asset
allocation over the financial year, it was more than offset by the Fund’s insurance-linked assets and emerging market bonds under-performing the strongly rallying core global bonds. These exposures are expected to out-perform core
global bonds going forward.

Returns from global financial assets, especially equities, have been volatile in the last year on account of feeble global
growth, large debt overhangs in major countries and fluctuating belief in global policymakers’ ability to rejuvenate flagging economies, notably in Europe, Japan and China.The Brexit vote also unnerved markets just prior to the June 30 close to the financial year.

The Fund’s investment return exceeded its Reference Portfolio and was also ahead of New Zealand Government Stock in the last 3 and 5 years.

Below is a comparison of the returns from each asset class compared to the relevant asset class benchmark. (All returns in New Zealand dollars before tax and after investment fees.)

Table 2: Asset Class Returns compared with Benchmarks for the financial year ended 30 June 2016

Asset ClassYear ended
30 June 2015
(Actual %)
Year ended
30 June 2015
(Benchmark %)
Total Fund2.12.31
Global Fixed Interest8.99.9
Global Equities-7.32-8.7
New Zealand Equities22.521.7
Catastrophe insurance0.00.1
Life settlements-8.3-8.3
Multi-asset class (in USD)-6.92-2.6
Global tactical asset allocation (in USD)7.7-4.6
Currency overlay5.435.3

1 The benchmark for the total Fund is the Reference Portfolio.

2 Returns are unhedged. All other asset class returns are hedged to New Zealand dollars.

3 Currency overlay return includes full hedging of all international assets except international equities and multi-asset
   class, which are hedged partially. The difference in return from the benchmark this year is due largely to active lowering
   of the hedge ratio below the benchmark ratio of 80% of total Fund assets (after tax).

Change in Net Asset Value of the Fund

Set out below is a table showing the change in the net asset value of the Fund for the financial year to 30 June 2016.

Table 3: Change in Net Asset Value of the Fund

Year Ended
30 June 2016
($ million)
Opening net asset value 1 July 20154,087.5
Interest and dividend income   112.0
Changes in Market Values:
     New Zealand Equities     64.3
     International Equities (including currency hedging)    -83.2
     Property      -1.2
     Commodity Futures      -7.1
     Multi-asset and Global Tactical Asset Allocation       2.5
     Insurance-linked Assets (net)     11.1
Total        2.9
Income Tax Expenses    -73.5
Operating Expenses*    -54.1
Net Membership Activities   113.9
Closing Net Asset Value 30 June 20163,960.9

Net Assets

The net assets are those used in the financial statements for the years ended 30 June 2016.

*  Operating Expenses includes a one off impairment of the new schemes administration system.