A legal opinion by law firms Chapman Tripp and MinterEllisonRuddWatts has outlined proposed changes to the KiwiSaver framework to support investment in private assets.
Commissioned by Toitū Tahua: The Centre for Sustainable Finance, the legal opinion says KiwiSaver members are missing out on investment options with potentially higher financial returns and long-term positive environmental, social and economic outcomes.
While most KiwiSaver members have 20 year plus investment horizons, there is little opportunity to take advantage of that longevity as less than 2% of the $100 billion in KiwiSaver funds is invested in unlisted shares. This is far less than retirement saving schemes in other jurisdictions, including the18% of Australian superfunds invested in private assets, the opinion says.
Co-author, MinterEllisonRuddWatts senior partner, Lloyd Kavanagh says at a time when New Zealand needs large amounts of capital to build sustainable infrastructure, it’s unfortunate some KiwiSaver regulatory settings unintentionally discourage some providers from investing in private assets.
“As a result, New Zealand trails well behind other countries, such as Australia, both in the proportion of retirement savings invested in private assets, and the returns earned by those retirement savings.
“Modifying the legal and regulatory environment to reduce those disincentives would serve a dual purpose of delivering better long-term value to KiwiSaver members and providing local capital to build much-needed infrastructure – especially to meet the risks and opportunities presented by climate change.”
Another co-author, Chapman Tripp partner, Tim Williams says the current KiwiSaver framework’s transfer and withdrawal settings deter private asset investment options by requiring all investors’ funds be available at any time to meet transfer and permitted withdrawals.
“Customers aren’t able to choose to commit their funds be held without transfer or early withdrawal options to access long term investments for greater diversification, to seek better potential returns or to meet their alternative investment preferences.”
He says private asset investment won’t suit every investor or be something all KiwiSaver providers will offer, but current KiwiSaver options lack the choices present in the broader NZ financial markets and internationally. This narrows the risk and return diversification choice in the KiwiSaver scheme universe, including the opportunity to provide needed capital for New Zealand’s development.
“It is worthwhile exploring why this is, and whether improvements can be made.”
Opt-out recommendation
While there is no explicit legal barrier to this activity and a number of KiwiSaver investment managers such as Simplicity, Booster and Pathfinder already invest in private assets, the opinion identifies three points that discourage providers:
- The need for sufficient liquidity to meet account portability obligations and member withdrawal entitlements;
- The requirement for daily pricing of assets; and lack of clarity around the requirement for fees not to be “unreasonable.”
The opinion outlines proposed legislative and regulatory amendments including tackling “liquidity bias” by allowing investors to opt out of account portability and early withdrawal entitlements, allowing for the creation of “private asset” funds with long term investment horizons, establishing a more efficient means of accommodating and adopting long-term asset valuation methodologies into KiwiSaver scheme trust deeds, and greater FMA recognition that higher fees are legitimately associated with private assets including clarification of the requirement that those fees not be “unreasonable.”
The legal opinion builds on Toitū Tahua’s Investing in Private Assets Recommendations paper released last year, which called for policy certainty (among other recommendations) for KiwiSaver providers and improving their capacity and capability for investing in private assets.
That paper came out of a technical working group composed of CSF partners ANZ, ASB, BNZ, Pathfinder, Harbour Asset Management, Milford Asset Management, Te Rūnanga o Ngāi Tahu, NZ Growth Capital Partners,Tauhara North No.2 Trust and Foundation North.
Key barriers and challenges identified by the group were policy certainty and regulatory clarity; KiwiSaver managers’ capacity and capability; organisational and market challenges posed by private assets; and KiwiSaver members’ expectation and financial literacy.
Toitū Tahua chair Bridget Coates, says both the government and KiwiSaver providers can do more to ensure KiwiSaver members benefit from a greater range of options to bring about better long-term value and contribute to the depth of NZ capital markets.
Commerce and Consumer Affairs Minister Andrew Bayly, who has received a copy of the opinion, has announced a review of KiwiSaver this year.