As New Zealand looks set to refine its pensions regulation, Rachel Alembakis looks at how the launch of the FMA will affect KiwiSaver
Several high-profile non-bank depositor failures in recent years have prompted the New Zealand government to begin an overhaul of the regulatory system for financial markets and participants. The move, which will affect KiwiSaver, will include several reviews and pieces of legislation that will be enacted in the coming months.
KiwiSaver’s institutional reputation has fared well throughout the global financial crisis, with most New Zealanders having a positive view of it. Minimum contributions are currently 2% of gross salary contributions from employers and 2% contributions from employees plus government subsidies to encourage member enrolment. In its three years of operation, KiwiSaver contributions have amassed to NZ$5.8bn ($4.3bn) with 1.7 million member accounts according to statistics released by the Inland Revenue in September. Thus far, KiwiSaver accounts for 9% of managed funds under investment in New Zealand.
The Financial Markets (Regulators and KiwiSaver) Bill was under consideration in the New Zealand parliament as Global Pensions went to press. If it is enacted as is expected, it will lead to two profound changes for the KiwiSaver industry as well as for the broader financial markets in New Zealand. Firstly, it will mandate the establishment of The Financial Markets Authority (FMA), a “super-regulator” that will unite the prudential and securities market regulatory functions for the first time in the country’s history.
According to the Bill’s explanatory note, the FMA “will be focused on promoting fair, efficient, and transparent financial markets. It will have a more active surveillance and enforcement role in relation to those markets, and will have additional functions and powers”. The FMA will incorporate the Securities Commission – the current financial market regulator and the Government Actuary, which currently regulates KiwiSaver and superannuation schemes. It will also include some functions from the Ministry of Economic Development in prospectus review and enforcement of governance laws, and the Ministry of Commerce in exchange rule approval.
Secondly, the bill changes the legal structure of KiwiSaver to explicitly name the responsibilities of the manager and the trustee. The changes will align KiwiSaver’s structure with public and member perceptions of who is responsible, and they dovetail with other legislation relating to the financial industry also working through parliament. It is also widely predicted to lead to the consolidation of the number of KiwiSaver providers because of new responsibilities and costs on trustees.
Industry professionals were by and large supportive of the establishment of the FMA, but cautioned that in order for the new super-regulator to succeed, it needed far more resourcing than currently given to the Securities Commission and the Government Actuary. The Government Actuary, for example, consists of 3 ½ actuarial positions to oversee the 52 KiwiSaver providers and the other superannuation schemes.
In a practical sense, some providers said their operations would not change that much because of the legal structure created around the establishment of KiwiSaver in 2006. At that time, the government selected six managers to act as so-called “default” managers to receive members who enrolled with the Inland Revenue but did not stipulate a choice in managers. In return for a guaranteed allocation of members, the default managers submitted to strict certification processes.
“It’s a little unclear as to what that means for providers,” said AXA New Zealand CEO Ralph Stewart. AXA New Zealand is a default provider. “Default providers were selected deliberately. We all have to provide ongoing certificates and meet standards. In practice, I don’t see it leading to any significant changes to managing the process of KiwiSaver. I think if you consider KiwiSaver to be a subset of the savings industry, what New Zealanders need now is trust and confidence in New Zealand financial services. Sadly, the trust and confidence has been sorely tested.”
Mercer New Zealand head Martin Lewington said he thinks the regulation applying to default providers will be extended across other KiwiSaver managers as well.
“For KiwiSaver providers, the fund manager will become the issuer,” he said. “They’ll have the direct duty of care to the investors. There will need to be an independent trustee and we already have an independent trustee for our default schemes – but our non-default scheme will have to have an independent trustee. There’s a lot of really good stuff in the legislation that we’re doing or moving towards doing, and good outcomes that will come under the FMA which will be around transparency, making sure that fees are disclosed in a way that is simple, clear and won’t confuse the members.”
Similarly, Tower chief executive of investments Sam Stubbs, also a default provider, said his firm has one set of fiduciary processes that apply over the default fund as well as their other, non-default KiwiSaver products.
“We have one standard across all of our products already,” Stubbs said. “We’re already well and truly geared up for that. The majority of KiwiSavers don’t. They don’t have independent trustees. They don’t have compliance standards that are sufficiently robust to pass ever higher tests. We’re well geared up for that.”
The second change to come in the Financial Markets (Regulators and KiwiSaver) Bill is a change to the legal definitions of who is a manager, who is a provider and what a trustee is responsible for. According to the explanatory notes with the bill, “a manager… is responsible, among other things, for offering interests in the scheme and managing scheme investments and property; and a trustee, whose main function will be to supervise the manager’s performance of its functions. The manager will be the issuer of the scheme for the purposes of the Securities Act 1978”.
“At present, for most schemes we have an independent statutory trustee acting as the issuer of the product, outsourcing operations to the manager,” said chair of peak body Workplace Savings New Zealand David Ireland, who is also a partner at law firm Kensington Swan. “That doesn’t reflect the commercial reality or the way the consumer would perceive the offering. If you asked a member of a scheme who is ultimately responsible for their scheme, they would not say the statutory trustee, they’d say the brand name of the manager. What the change in the FMA bill is doing is making the legal structure reflect what the marketing/practical structure already is.”
The changes to the law as proposed under the bill will cause trustees to participate in a licensing regime that is being introduced in a separate bill, the Securities Trustees and Statutory Supervisors Bill. The explanatory note to the Financial Markets (Regulators and KiwiSaver) Bill says that once the Securities Trustees and Statutory Supervisors Bill is passed, its language will be inserted into an amended version of the Financial Markets bill once the regime is up and running, which is expected to be mid-2011.
Ireland said that such a regulatory change will entail alterations to legal documentation, but not fundamental changes to the way KiwiSaver providers do business.
“There will be a bit of upheaval in the legal documentation side, and in the contractual arrangements, but I think, in most quarters, provided they introduce effective transitional measures to minimise the regulatory impact, everyone in the market will be fine,” he said. “It makes sense. You no longer have to run through all the machinations we have at present, which should make things simpler. It becomes an easier story to communicate to the members.”
The changes will clarify previously uncertainties, said Simon Botherway, a member of the New Zealand Securities Commission and chair of the establishment board of the Financial Markets Authority. The establishment board is charged with creating the FMA in line with its legislative agenda.
“The FMA establishment legislation actually clarifies a previously grey issue – whether the issuer of the KiwiSaver is the trustee or the manager. It makes clear that the manager is legally the manager of the scheme,” Botherway said. “Trustees and auditors will also be required to be licensed. In addition, the Securities Act review flags up the prospect of fund managers being licensed. Most of these professions are moving from being unlicensed to licensed.”
The perception in the industry is that this change will probably lead to consolidation in the number of KiwiSaver providers, because fees for statutory trustees seem likely to increase as their business becomes more complex. At the moment, there are only four statutory trustee corporations acting as trustees of KiwiSaver schemes, and under the new legislation, they will have greater accountability and power, Ireland noted.
As a result, some providers will look to get out of the business because the economics of KiwiSaver provision will change, said Stubbs of Tower Investments.
“The industry will have to consolidate when you have a true independent fiduciary,” said Stubbs. “Some trustees are going to be uncomfortable with taking on those schemes with highly concentrated investment strategies or highly volatile returns. That helps consolidate the industry. Trustee fees will go up – with responsibility comes work and with work comes cost. I would think it would be one of the primary drivers of the consolidation of KiwiSaver in New Zealand.”
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