Periodic reporting requirements are authorised by the Financial Markets (Regulators and KiwiSaver) Bill, due to be reported back to the Commerce Committee soon, and the details are to be prescribed in Regulations and the Financial Markets Authority (FMA) Guidelines.
The Bill is expected to take effect around July 2011, with the supporting Regulations being promulgated in the second half of 2011. It is likely that quarterly and annual disclosures will be mandatory from 2012/2013.
Some issues to consider
Duplication of reporting
The proposed disclosures will be additional to the annual return and the annual report currently required under the KiwiSaver legislation (though we understand it is intended that the new quarterly disclosures need only be posted on websites, not given to members). Annual reports must be sent to all members, unless the provider is able to take advantage of recent compliance relief, which has prescriptive consent requirements. We think providers should lobby for relief in relation to the annual report, similar to that being given to unit trusts in the Regulatory Reform Bill, under which members need only be given a notice of availability of the annual financial information (hard copy to be provided on request or soft copy available electronically).
Changes to fee structures likely and could be “unreasonable”
One of the proposals is to require all fees and charges to be disclosed as percentages. This would require many providers to change their fee structures, under which administration fees are commonly charged as a flat monthly per member fee, and is likely to result in larger account holders subsidising smaller account holders. Such a fee change, assuming it is permitted under the terms of the relevant deed, could be regarded by the Government Actuary as unreasonable.
Utility of some of the information required
The Discussion Paper proposes that key personnel of an investment team, as well as length of tenure and possibly compensation structures, be included in the disclosures to members. It is important that this information be available to investors or their advisers and to market commentators and analysts, though we doubt that it will be of much interest to the average mum and dad investor. It may be more appropriate to include it in the prospectus, rather than a quarterly disclosure.
Outline of proposals
Under the proposals, providers will be required to report quarterly to members and annually to the FMA on:
fees and charges
fund performance and returns
asset allocation and portfolio holdings, and
fund manager tenure, key personnel and conflicts of interest.
The purpose of requiring periodic reporting is to provide investors, advisers, regulators and market commentators with consistent and comparable information on retail KiwiSaver schemes. In particular, the requirements are intended to enable market commentators to compile league tables and provide informed analysis of fund performance.
Who will be required to periodically report?
All KiwiSaver schemes other than “restricted” schemes will have to provide periodic reports. The Bill identifies certain employer-based and restricted-entry schemes as restricted KiwiSaver schemes. These are schemes offered solely to particular employee, industry or religious groups.
The Discussion Paper anticipates that periodic reporting requirements will in due course also be imposed on issuers other than retail KiwiSaver scheme providers.
What has to be reported?
Fees and charges
The current approach is to be replaced by a regime requiring full disclosure of fees and charges. The overriding objective is that all costs deducted from the assets of a fund should be disclosed, as well as all charges levied on members themselves.
A number of complex issues arise in achieving these objectives.
For a start, terminology must be consistent, so the Discussion Paper proposes a standard set of definitions. The fees and expenses-related definitions contained in the Investment Savings & Insurance Association’s new Standard for Calculation and Disclosure of Fees and Expenses are suggested as the starting point.
In addition to investment management fees, administration fees and operating expenses, other fees are identified as targets for improved disclosure. These include transaction costs, performance fees and any commissions payable to advisers from fund assets.
A template quarterly disclosure report is included in the Discussion Paper. This template is reproduced below. It would divide fees into three categories, each of which must be separately disclosed:
costs of moving in or out of the fund (establishment, contribution, withdrawal, termination and transfer fees, as applicable)
costs of servicing investor-specific decisions (switching, financial adviser fees and any special request fees, e.g. for hardship withdrawals), and
costs of investing in the fund.
The template requires the last of these categories to be broken down into annual management fee, any performance fee, monthly member fee and transaction costs.
It is proposed that each quarterly report must disclose the total expense ratio (TER) for the relevant fund. This is described as the predominant method globally for calculating and presenting total fund fees as a percentage of the relevant fund’s average net assets. What costs will be in or out of the TER is up for discussion.
The MED’s proposals do not mirror the ISI Standard in relation to the TER calculation methodology. For example, the MED prefers to include performance fees in the TER. The MED proposals are closely aligned with the TER methodology developed by the International Organisation of Securities Commissions (IOSCO). Feedback is sought on whether the IOSCO TER standard is appropriate, and on specific issues, such as inclusion of monthly administration fees and transaction costs in the TER. Mandating the use of a “synthetic” TER where the fund invests in sub-funds is also under discussion.
Fund performance and returns
Various investment performance standards are discussed as options for adoption in New Zealand. One option is to adopt GIPS (Global Investment Performance Standards). While not mandated internationally, GIPS (or a local variant) are becoming an accepted pre-requisite for mutual funds in the US and Australia. GIPS assess a fund manager’s performance based on its investment mandate, objective, strategy and asset class, rather than measuring individual fund returns. The MED seeks feedback on whether GIPS is appropriate for KiwiSaver reporting requirements.
Another issue under consideration is whether returns should be reported net or gross of fees, and net or gross of tax (or both). Reporting of past annual returns, in a standard graph format, is proposed. These returns would be net of fees and gross of tax, which in our view is appropriate on both counts.
The Discussion Paper suggests including worked examples in quarterly reports to illustrate the effect of differing prescribed investor rates of income tax on a standard investment amount over time.
Asset allocation and portfolio holdings
The Discussion Paper suggests requiring disclosure in each quarterly report of the relevant KiwiSaver fund’s top ten investment holdings. Logically this would descend to the level of disclosing assets in which any sub-funds are ultimately invested.
Asset allocations (by sector) as at the reporting date would also be included, in pie graph form.
Liquidity ratios, gearing and portfolio turnover would also require disclosure in the quarterly report.
Fund manager tenure and conflicts of interest
The Discussion Paper proposes requiring disclosure of investment managers’ key personnel and their length of tenure. Details of remuneration packages may also have to be available on the KiwiSaver scheme’s website, particularly if key personnel are paid based on performance.
Various fund manager conflicts of interest may have to be disclosed. These might include (among other things) any soft dollar arrangements and any material related party transactions undertaken in the last quarter.
Format of reporting
MED regards it as critical that consistency and integrity of data is secured. Common and consistent terminology is likely to be prescribed. A standard template for disclosure of fees is proposed. The preferred option is to have all costs and fees disclosed as percentages, including the monthly member fee (which is, in practice, commonly expressed as a dollar amount). Use of worked examples may be mandated, based on a $10,000 and a $50,000 initial contribution.
The proposed template for quarterly reporting to investors is set out here. In addition, an annual disclosure will likely be required, addressed to the FMA and published on the provider’s website. The information in the annual disclosure to the FMA would be based on audited financial information. This annual disclosure would include (expressed as percentages) details of:
all fees and expenses, broken down by category and type
whether each fee is included in the TER or not, and
how and when each particular fee is paid (directly by the investor, forming part of the unit price, or from fund assets).
For further information, please contact the lawyers featured.
The proposals are detailed and require very careful analysis by KiwiSaver providers, with input from their fund managers. There are likely to be increased costs for providers in gathering and collating the relevant information, in particular for the annual disclosure.