The KiwiSaver provisions in the Financial Markets (Regulators and KiwiSaver) Bill have emerged from the select committee more workable, clearer and much better integrated into the existing legislation.
This Brief Counsel comments on the changes in detail. It is a companion piece to our earlier commentary on the financial market components of the Bill.
Managers’ and trustees’ duties
The Bill introduces a fundamental change to the governance structure for a retail KiwiSaver scheme, whereby the manager becomes the issuer of membership interests and the trustee becomes a statutory supervisor. Chapman Tripp and others submitted that the full scope of this change was not adequately reflected in the original Bill as a number of core powers and duties which should pass to managers remained with trustees.
These submissions have been accepted with the result that managers will now be responsible for:
issuing annual reports (after consulting trustees)
submitting annual returns to the Financial Markets Authority (FMA)
issuing annual member statements
authorising withdrawals, excluding those for significant financial hardship and serious illness (see below)
issuing bulk transfer communications (after consulting trustees) and seeking FMA consents to bulk transfers between schemes
originating trust deed amendments (trustees or their solicitors must still issue compliance certificates)
notifying changes to the KiwiSaver Schemes Register, and
supplying scheme-related information on request from members or the FMA.
More generally, both trustees and managers will now be subject to express duties to act in members’ collective best interests when exercising powers and performing duties. Only managers, however, will remain subject to the general “prudent person” standard with respect to investment decisions - a recognition of the trustee’s now more limited role.
A trustee will be required to exercise the care, diligence and skill that a prudent professional trustee would exercise in “acting as the trustee of a KiwiSaver scheme” other than a restricted scheme.
The proposal that trustees will retain legal responsibility for administering the serious illness and hardship-based withdrawals facilities now seems even more incongruent. Dealing with hardships (in particular) is one of the more labour-intensive aspects of KiwiSaver scheme administration, in view of the strict compliance criteria and evidentiary requirements, and reviewing those withdrawal applications seems firmly on the “operations” side of the manager/supervisor divide.
We acknowledge that trustees may continue delegating to managers the performance of their evidence-gathering and review functions (though not their deliberative functions) with respect to illness and hardship-based withdrawals. But we still consider it preferable for these two facilities to be manager-administered, with trustees supervising procedural compliance.
As to the concern about manager conflicts of interest (the stated basis of which is that a manager’s main interest is to keep moneys in the scheme), it needs to be borne in mind that under the Financial Service Providers (Registration and Dispute Resolution) Act, every KiwiSaver manager must now belong to an independent dispute resolution scheme.
Members can already access dispute resolution schemes if trustees refuse withdrawal applications made on either illness or hardship grounds, and we understand that this has begun occurring in practice.
Securities Act compliance
The Bill has been amended to specify that existing retail KiwiSaver scheme members need only be notified of the scheme changes resulting from the Bill (rather than receiving full new investment statements, as would have been required for technical reasons under the Bill as first drafted).
Under the new provisions:
the manager must post on the scheme website an information document explaining the material scheme changes, and
each existing member must be given a statement briefly describing those changes, and advising that the information document has been posted to the website and that copies are available on request.
The deadline for posting an information document to the website and sending a statement to each existing member will be the earlier of 31 December 2012 or three months after the scheme adopts the new legislation.
Trustees and managers may make the governance changes at any time after the Bill has come into force (probably in the second half of this year). Compliance becomes compulsory at 30 September 2012. The FMA must be notified within 20 working days before the chosen effective date for a scheme’s adoption of the new legislation, and must also approve all trust deed amendments.
The transitional provisions are designed to enable the requisite scheme changes to be implemented as part of the scheme’s 2011 or 2012 prospectus renewal process. The September 2012 compliance deadline recognises that it may not be practicable to achieve this by a September 2011 rollover date.
During the transition period until a trustee elects (or is required) to comply with the amended legislation, the current KiwiSaver governance legislation will be deemed to continue applying to the relevant scheme as if the KiwiSaver Act has not been amended.
The KiwiSaver governance changes in the Bill will necessitate detailed consequential amendments to the prospectus requirements in the Securities Regulations (we submitted on this aspect last year). Those regulatory amendments have yet to be prescribed, which is another reason why deferral until 2012 may become necessary in some cases.
As a “backstop” allowing regulatory provision for other transitional matters, the Bill also now prescribes a transitional KiwiSaver-related regulation-making power which will remain available until 31 December 2013. Permissible regulations will include delaying the application of certain provisions, changing how certain provisions apply and creating new short-term transitional or savings provisions.
Restricted KiwiSaver schemes
“Restricted KiwiSaver schemes” are a provisionally listed group of non-retail schemes which will not be subject to the governance changes prescribed in the Bill.
Our main concern with the proposed test for restricted scheme status was that it would not be broad enough to cover schemes which offer memberships to persons employed by groups of associated employers and their successors in business. Another previous concern was the exclusion of the immediate family members and dependents of qualifying offerees.
A restricted scheme will now be permitted to offer memberships to:
persons employed by related bodies corporate of a principal employer, and
persons who are immediate family members of, or wholly or partially financially dependent on, a person who is a qualifying offeree.
Restricted schemes will also now be permitted to change their conditions of entry, with FMA consent.
Use of nominees
The Bill was unduly restrictive where it prescribed that a KiwiSaver scheme’s investments “must be vested in the trustees”. It has now been amended to recognise (and expressly permit) the use of nominee companies to hold scheme assets under trustees’ control.
The Bill no longer requires trustee approval of a scheme’s financial statements. Additionally, the Financial Reporting Act will now be expressly amended to prescribe that the manager of a retail KiwiSaver scheme is the issuer for the purposes of that Act.
In an acknowledgment that the annual reporting requirements imported into the KiwiSaver Act from the Superannuation Schemes Act (with some modification) require revisiting, the content of annual reports will now be prescribed by regulation rather than in the KiwiSaver Act itself. A new regulation-making power has been prescribed for this purpose.
Amending trust deeds to comply with the new legislation will be particularly complex for umbrella trust-based schemes, as the two schemes within the umbrella will now each have materially different governance structures.
In response to informal suggestions, the Bill now prescribes a workable facility for the parties to an umbrella trust arrangement to elect instead that the two schemes will split into entirely separate trusts.