For KiwiSaver change is, it seems, the only constant. This Brief Counsel comments on the latest round of proposed KiwiSaver changes.
We also report on a bombshell suggestion, tucked within the 200-page Securities Law Review discussion document, to grandfather existing employer provided superannuation schemes.
Lastly we provide a brief potpourri of legislative updates.
Enhancing KiwiSaver governance and reporting
In response to well-publicised concerns about perceived inadequacies in the KiwiSaver reporting and governance regime, the Government plans to fast-track legislation:
to bring the required governance structure for a retail KiwiSaver scheme into line with the Unit Trusts Act so that:
the manager - or product provider - is legally the issuer of membership interests (so is primarily liable if disclosure documents contain false statements) and owes its management duties direct to scheme members, and
the trustee still owns scheme assets but is otherwise responsible solely for supervising the scheme manager
to require the trustee (which must be a body corporate) to be licensed by the Securities Commission pursuant to the pending Securities Trustees and Statutory Supervisors legislation, and
to assist with healthy competition between schemes (based on the provision of readily accessible and easily comparable information), to require providers:
“to periodically publish, provide to investors and provide to the regulator, specified information on fees, returns, asset allocation and conflicts of interest in a prescribed manner”,
but without unnecessarily duplicating annual and (for default providers) quarterly reporting requirements.
We agree that there are valid policy reasons for retail KiwiSaver schemes to be governed in the same manner as other types of managed funds. We caution though that the “retail” concept must be very carefully defined. Accordingly, we welcome the Cabinet paper’s indication that (while there will, of course, be “boundary” disagreements) the concept of a “non-retail” scheme should in principle extend beyond employer-based schemes to include schemes available only to; members of particular unions or professions, or to persons of a particular “calling” through a church scheme.
These schemes invariably operate on a not-for-profit basis and are small, such that restructuring and trustee licensing costs would likely be prohibitive. Unlike retail KiwiSaver schemes, they are also typically trustee-established (making the current framework in our view a more appropriate “fit” conceptually than the unit trusts model).
The Cabinet paper estimates the cost of changing trust deeds to reflect the new governance structure at “up to $50,000 per scheme”. While we think that this may be an over-estimate in a good many cases, we nevertheless suggest that consideration be given to enabling the use of “deeming” provisions instead of requiring the changes to be expressed in their entirety in every scheme’s trust deed as soon as the law change takes effect. This might, at a minimum, be useful in terms of making it possible then to recast trust deeds in “one hit” should any additional prescriptive requirements emerge from the wider Securities Law Review.
Clause 90 of the Securities Trustees and Statutory Supervisors Bill already contemplates such a mechanism for unit trusts. Successive amendments to the KiwiSaver Act have also implied into trust deeds all the terms necessary to give effect to post-inception law changes such as the matching government contributions and compulsory employer contributions legislation. These have avoided major cost imposts.
As is now well-known, the enhanced reporting proposals will likely require information to be made available quarterly to the regulator, investors and the wider public. The Cabinet paper usefully clarifies though that the Minister does not anticipate providers sending quarterly materials to every investor, and that by implication they need only be made available on websites. Investors are considered likely to be satisfied with annual statements, “supplemented by the ability to access the public quarterly information” and a right to receive further personalised information on request.
These additional reporting requirements are not expressly confined to retail KiwiSaver schemes. The paper contemplates that all KiwiSaver schemes will be required to make quarterly reports available to investors and the regulator. Sensibly however, only retail schemes must also make them available to the public at large.
The paper contemplates that the reporting requirements will be prescribed by regulation within 12 months after the proposed enabling legislation is enacted. They will prescribe such things as fees and returns calculation methodologies and a standard reporting template.
The Government Actuary and the Insurance and Superannuation Unit
The Cabinet paper elaborates on proposals to transfer to the Financial Markets Authority the functions of the Government Actuary (GA) under the KiwiSaver and superannuation schemes legislation. The GA’s statutory role will be disestablished, and both his and the Insurance and Superannuation Unit’s principal functions will be transferred to the FMA. All legislative references to the GA will be replaced with references to the FMA (for regulatory functions) or to a suitably qualified actuary (for actuarial functions).
Securities Law Review – our take on a bombshell
The Ministry of Economic Development’s 200-page Securities Law discussion paper, on which we commented in detail last month, contains something of a bombshell. In the context of an otherwise sensible proposal to exempt workplace-based defined contribution superannuation schemes from the revised governance regime for collective investment schemes (which is being accelerated for retail KiwiSaver schemes), the paper observes that:
“The Ministry’s initial view is that an expedient approach may be to grandfather all existing schemes (thus precluding any new investors from joining those schemes while maintaining the status quo for existing investors)…”
The paper acknowledges that defined benefit schemes are different. It notes the recognition in the Review of Financial Products and Providers (RFPP) that the revised governance regime would not be appropriate for those schemes.
The possibility of forced closure to new joiners is presented without supporting reasoning and may be a deliberately extreme scenario put forward for the perfectly valid purpose of eliciting responses. Ours is that we would be disappointed if forced scheme closures ever came to be treated as a credible option.
The RFPP’s Collective Investment Schemes (CIS) paper noted the positive design features of employer stand-alone schemes, and acknowledged concerns about costs and forced wind-ups if structural changes were imposed on those schemes. The paper had proposed exempting such schemes from a revised CIS governance regime without requiring forced closure to new joiners.
We think this is the right approach, not least because:
defined benefit schemes (almost all of which are employer stand-alone schemes) will necessarily remain governed by the existing legislative framework, and
a good many of those schemes are hybrids, with both defined contribution and defined benefit sections comprised within a single trust structure.
We will be assisting with detailed submissions to MED on this issue, explaining (among other things) why in our view there are key respects in which the revised governance arrangements proposed in the Securities Law Review could not practicably be made to work – or would disproportionately complicate scheme administration – should any employer stand-alone scheme seek to comply.
An important consideration is that the trustee (or trustee board) of a stand-alone scheme is the scheme provider so would logically remain as legal issuer if opting into the new regime - but with the compulsory bolt-on (at members’ expense) of an external supervisor as another entirely new tier of governance. In a retail scheme, by contrast, the existing provider and its trustee would simply take on different roles.
We will also address the near-consensus view that, for stand-alone non-profit schemes (and here we include industry, profession and church-based schemes), the current legislative structure is working tolerably well. And there is absolutely no substance to assertions that members might somehow be better off by reason of a root-and-branch restructuring paid for (of necessity) from their own retirement savings.
As to the “grandfathering” option, a scheme which has a closed, inexorably diminishing membership complement enters an inevitable death spiral and faces steadily increasing costs on a per member basis.
We think that a more measured solution for improving the governance of existing stand-alone schemes which want to remain open to new members would be to require them to have one independent trustee (or one independent director, if the trustee is a company).
This is increasingly seen as best practice on company boards, and is already reasonably common among schemes themselves. Accompanying this change would be a legislative amendment enabling it to occur (and, for good measure, clarifying that individual trustees can convert to corporate trusteeship if they wish) without either deed amendment or member consent issues arising.
Workplace-based and other not-for-profit schemes contribute billions of dollars to New Zealand’s savings base. They exhibit “best-of-breed” features that cannot practicably be replicated elsewhere and – in our best legalese – their sponsors are the good guys. They have gone on volunteering, with no profit motive and often at considerable cost, a facility which KiwiSaver is expressly intended not to replace but to complement.
Our submissions on the Securities Law discussion paper will also cover issues such as:
ensuring that in terms of the content requirements for the proposed Register of Securities, employer-based and other schemes which are currently prospectus-exempt retain (at least in substance) their current exemptions in areas such as trust deed summaries, material contracts and disclosure of other material matters, and
minimising cost and complexity in terms of requiring amendments to trust deeds that are already satisfactorily prescriptive in a practical sense (where PDS disclosures will suffice, or are objectively preferable in terms of not unduly restricting a scheme’s operations).
Taxation Bill - miscellany
Inland Revenue advises that enactment of the long-awaited Taxation (Annual Rates, Trans-Tasman Savings Portability, KiwiSaver, and Remedial Matters) Bill is now expected during August. A few points, meanwhile, which we thought were worth noting.
- The Supplementary Order Paper (SOP) proposing amendments to allow 6% or 10% KiwiSaver employee contribution rates as added options is an ACT initiative and it remains unclear whether it has National Party support. Providers should bear this in mind when drafting replacement subscription materials.
- The additional prescriptions relating to minors’ enrolments were to have taken retrospective effect on 1 July 2010, so we sought postponement to 1 October and were partly successful - they will now take effect when the Bill is enacted.
- We made a pro bono submission to Inland Revenue following Budget 2010 seeking the outright repeal of the fund withdrawal tax legislation effective 1 October 2010. The jury is out, but we are optimistic that common sense can prevail (and that the Taxation Bill can be used to repeal the complex grandfathering regime which will otherwise take effect on 1 October).
Submissions on the Securities Law Review paper close on 20 August.
For further information or assistance in preparing a submission, please contact the lawyers featured.