<typohead type="3">3. Trustees</typohead>

The Trustees of the Fund continue to be The Presbyterian Church Property Trustees who are appointed by General Assembly and constituted under The Presbyterian Church Property Act 1885 and its amendments. A list of the Trustees at 30 June 2003 is given in the Directory at the end of this report.

<typohead type="3">4. Beneficiary Fund Committee</typohead>

The Beneficiary Fund Committee is appointed by General Assembly. The General Assembly has delegated to the Committee responsibility for administering the regulations. The membership of the Committee at 30June 2003 is given in the Directory at the end of this report.

<typohead type="3">5. Investments</typohead>

5.1 Investment Objectives

The Trustees set the investment objectives of the Fund after seeking advice from an independent investment advisor. Those objectives are detailed in the Statement of Investment Policies and Objectives (SIPO).The Trustees appoint managers to invest the assets of the Fund in accordance with the objectives set down in the SIPO. Other than a small pool of fixed interest investments the Trustees do not manage the investment of the Fund's assets. Instead they monitor the conformity of the managers to the policies and objectives contained in the SIPO.

The Trustees have conducted with the assistance of their investment advisor a further review of the SIPO during the year in response to the significant changes that occurred in financial markets following the events of 11 September 2001.

Before implementing the new SIPO the Trustees took further independent advice to confirm the proposed new asset allocations. The Trustees recognise that there is still a requirement for the Fund to have a significant portion of is investments in growth assets because of the long-term nature of Fund liabilities. However those assets should not be subject to the same level of price volatility as has been experienced in recent times.

The Trustees have therefore agreed that a relatively small portion of the Funds assets should be released from direct investment in offshore share markets into investment in funds that focus on using a variety of short-term investment strategies to achieve a return that does not rely upon selecting individual share investments that will increase in value in the future. These funds are known as absolute return funds. While the returns generated by absolute funds will be influenced by market returns the wide fluctuations in investment returns seen in recent years should be absent. Absolute return funds have grown from fringe market operations to mainstream investment vehicles in recent years as investors, similar to the Beneficiary Funds ought stable and sustainable long run investment returns. Such funds now have sufficient investment history to warrant consideration as a main stream investment.

The Trustees have also determined that it is appropriate that the Fund invest a portion of its assets in commercial property but not through direct ownership. The Trustees are currently seeking an appropriate vehicle for this investment. There are advantages where the investment vehicle allows the Fund to benefit from its tax-free status. It may take a number of months to achieve the benchmark holding of property assets. The Trustees recognise and accept that the conditions of their property investment may prevent a quick sell down of the asset.

At 30 June 2003 the Fund was in the process of transition from the old to the new SIPO. As a consequence holdings of cash were higher than their benchmark as equity investments had been realised to generate the cash to invest in the new sectors. Since 30 June 2003 investments in each sector have moved closer to their benchmark targets.

As part of their review of the SIPO the Trustees have changed the method they will use to determine the performance of the Fund and its individual fund managers. Previously fund managers were expected to achieve a return in excess of the index for their investment sector(s). Based upon the historic performance of each sector the Trustees had an expectation of a total return for the Fund. The trustees have now set a specific target return for the Fund and will more actively change the benchmark in recognition of changing investment performance between sectors. The performance of individual investment managers will still be monitored against a target set in relation to their investment. Index. Out performance of the various indices is now seen as not sufficient if those indices are not going to provide the returns required by the Fund.

The Trustees’ primary investment performance objective is to achieve at least a 5% annualised return on average, over and above the average annual rate of increase in the CPI over rolling three-year periods.This target compares with a 4% real return assumed by the actuary. The secondary objective is to earn a gross return that is in the top 25% of returns of comparable funds in New Zealand.

Set out in the following table is the indices the Trustees will be using to measure the performance of the individual investment managers.

5.2 Who is Investing the Assets?

Set out below is a table showing the Fund's investment managers at30 June 2003 and of the asset classes covered by each of their investment mandates.

BNZ Investment Management Ltd
Offshore equities invested through the Templeton Global Fund.

ING (NZ) Ltd (formerly Armstrong Jones)
Australasian equities, New Zealand bonds, offshore bonds and cash.

New Zealand Guardian Trust Funds Management Ltd
Australasian equities, offshore equities invested through the Capital International Fund, New Zealand bonds, offshore bonds, cash and currency exposure in respect to their portfolio.

The Church Property Trustees
Mortgages and loans on properties, establishing benchmark positions for foreign currency exposure and tactical asset allocation

During the year the investment mandate of Endeavour Funds Management was terminated due to inadequate investment performance. Endeavour was managing the Fund’s exposure to movements in foreign currencies and tactical asset allocation.

5.3 What is the Money Invested In?

The actual allocation of investment assets compared with the benchmark asset allocation contained in the SIPO is given in the following table. The benchmark represents the long run target allocation set by the Trustees. In the short-term investment managers and the Trustees vary the actual level of investment in each asset class in recognition of differing short run investment returns being achieved within each investment sector.Investment managers may only vary their investment portions within a range set by the Trustees.

On a comparative basis, the share of funds has been allocated amongst the managers as follows:

The Fund is exempt income tax and benefits are paid tax free in members’ hands. The investment performance of the Fund over various periods was:

<typohead type="3">7. Interest Rate on Supplementary Scheme Accounts </typohead>

The Regulations provide that interest shall be credited on Supplementary Scheme Accounts at a rate determined by the Committee. In view of the fact that the return on the Fund’s investments over the year was negative, the interest rate declared by the Committee was zero. This rate is the same as that applied in the previous financial year.

An interim rate is determined and applied when balances are withdrawn during the financial year. The interim rate is replaced by a declared rate once the returns for the year are known. Because of the ongoing negative returns on the Fund, the interim rate applied to withdrawals was zero for the whole of the 2002/03-year.

<typohead type="3">8. Increase in Existing Annuities</typohead>

In accordance with the Regulations, annuities were increased by 1.25% with effect from 1 July 2003. The increase was the minimum permitted by the regulations in recognition of losses being incurred in investment markets.

<typohead type="3">9. Contributions</typohead>

The Trustees confirm that all contributions required to be made to the Fund in accordance with the terms of the Trust Deed and Regulations have been levied and recorded in the accounts of the Fund. Some contributions from both parishes and members for the year ended 30 June 2003 that remain unpaid. Concerted efforts are being made to collect these contributions. The amounts of contributions due to be paid to the Fund have been calculated in accordance with the Actuary’s recommendations in the valuation report as at 30 June 2000.

<typohead type="3">10. Changes to the Trust Deed and Regulations</typohead>

There have been no changes to either the Trust Deed or the Regulations during the period of this report.

<typohead type="3">11. Reports Received by the Trustees</typohead>

The Trustees have received a report from the Fund’s actuary dated 30 June 2003 detailing the various assets and accrued and future liabilities of the Fund. The Funds actuary Ms Linda Caradus of Melville Jessup Weaver has completed the actuarial review in accordance with the requirements of the Superannuation Schemes Act 1989.

The report states that at 30 June 2003 the Fund had available to it $62,960,000 of assets to pay past service liabilities of $59,103,000. Past service liabilities comprise; the estimated cost of providing annuitants and their spouses pensions for the balance of their lives and a funeral benefit, the cost of retirement benefits for frozen members and the cost of providing contributing members the benefits they have earned by past service as at the date of the valuation.

For the Fund to continue paying all the present benefits, some of which are paid at the discretion of the Beneficiary Fund Committee would require the Fund to have either a further $32.5 million of assets or for annual parish and employer contributions to be increased to 43% of the basic stipend.

The Fund cannot afford to continue paying the current level of benefits. Therefore the Beneficiary Fund Committee is reviewing the benefits that can be paid with a particular emphasis on the cost of medical benefits. The cost of providing medical insurance under the current arrangement is estimated at $19.1 million. A rapid rise in medical insurance premiums in the last two years has led to a very significant increase in the cost of this benefit.

For the actuary to complete the report she must make some assumptions about the future. The key assumptions used in the preparation of the report are set out in the following table. The assumptions used to prepare the 2000 report are also shown.