Consultation on proposed reforms to facilitate KiwiSaver investment in private assets

On 13 December 2024, the Hon Andrew Bayly announced that the Government is progressing a package of reforms aimed at strengthening and growing New Zealand's capital markets. The package includes proposals aimed at enabling investment by KiwiSaver schemes in private (unlisted) assets.

The Ministry of Business, Innovation and Employment (MBIE) has now published a discussion document titled Enabling KiwiSaver investment in private assets and is seeking feedback from industry and the public on potential regulatory changes to achieve that goal.

In this article, we provide a brief overview of the proposals.

Current obstacles to investing in private assets

Currently, the level of funds held in KiwiSaver accounts invested in private assets is low. MBIE states that it is 'particularly low compared to pension funds in other jurisdictions' at around 2-3% (compared to Australia's almost 16% of superannuation assets as at 30 June 2024). In the discussion document, MBIE refers to potential benefits of greater private asset investment for both KiwiSaver members and New Zealand's businesses and wider economy.

MBIE notes that there is an inherent mismatch between the long-term nature of investment in most private assets and KiwiSaver providers' obligations under the KiwiSaver Act 2006 (KS Act) to have funds readily available to give effect to members' withdrawal and transfer requests. Put slightly differently in the discussion document, liquidity risk 'is the risk of the assets not being able to be 'liquidated' or converted into cash at a reasonable price or within a reasonable period as and when fund investors request it'.

MBIE is proposing four potential measures to enable KiwiSaver providers to manage this liquidity risk.

Proposal 1: Enabling KiwiSaver providers to use liquidity risk management (LR) tools

MBIE states that liquidity management tools (LMTs), which are described in more detail in the Financial Markets Authority's (FMA) April 2024 Liquidity risk management guide, are essential for fund managers investing in private assets and can enable them to fulfil their statutory duties.

The discussion document identifies several provisions in the KS Act that the industry has identified as limiting the ability of KiwiSaver providers to use certain LMTs that may be necessary or appropriate for managing liquidity risk associated with private assets. Those provisions include requirements that:

• transfers of funds from one KiwiSaver scheme to another be made within ten working days of the member's request (unless both providers agree otherwise)
• withdrawals permitted under the KiwiSaver scheme rules in the KS Act be paid out reasonably quickly in accordance with the terms of the trust deed of the KiwiSaver scheme.

MBIE states that, based on discussions with industry participants, it thinks there is broad agreement that KiwiSaver providers should have more express access to LMTs, including side pocketing (isolating a problematic or less liquid asset until it can be sold or its value recovers) and redemption gates (provisions enabling the provider to carefully control withdrawals over a period of time).

Accordingly, it is proposing to explicitly enable all KiwiSaver providers to override the scheme transfer and withdrawal requirements in the KS Act when it is a necessary step for them to manage the liquidity risk of investments. In practice, MBIE expects that this would likely require clear disclosures regarding LMTs in trust deeds, statements of investment policy and objectives, and offer documents. MBIE also states that, as updates to those documents are made, members would have a choice to opt in or out of the scheme.

Proposal 2: Improving private asset visibility in regulatory disclosures

Fund managers are required to disclose in quarterly (or, for some, annual) fund updates the types of assets that the fund invests in, using the categories listed in the Financial Markets Conduct Regulations 2014 (FMC Regulations). Those categories do not fit well with private assets, meaning a fund's exposure to private assets may not be clear to investors or to the market generally.

In the discussion document, MBIE is seeking feedback on four possible options to enable greater visibility of private assets:

• creating a new category for 'private assets'
• modifying existing categories to better include private assets
• modifying existing categories with the requirement that the category reflects the underlying assets held
• adding new sub-categories (e.g. adding 'NZ unlisted equity' under 'Australian equities').

Proposal 3: Ensuring valuation requirements support private asset investment

The Financial Markets Conduct Act 2013 (FMC Act) requires that a KiwiSaver scheme's trust deed sets out the methodology, or the rules applying to determining the methodology, and other rules applying to valuations of assets of the scheme and pricing of interests in the scheme.

Issues have been identified regarding the application of the provisions of certain (generally older) trust deeds where private assets are held (as private asset valuation information is available less frequently than for publicly traded assets), and the ability to amend trust deeds to specifically accommodate private assets.

MBIE is interested in whether it is necessary to clarify the FMC Act so that KiwiSaver providers can modify their trust deeds to allow for valuation practices that support investment in private assets. No specific proposals have been made on this point at this stage, pending feedback on this threshold question.

Proposal 4: Consideration of the total expense ratio (TER) formula

A standard fee measure used by fund managers is the TER, which is the ratio of the total costs of managing and operating a fund divided by the value of the fund's total assets. The FMC Regulations require fund managers (including KiwiSaver providers) to disclose their synthetic TER in fund updates and on the Disclose Register.

MBIE notes that the industry has voiced concerns that the formula for calculating the TER and the requirement to make it public can disincentivise KiwiSaver providers from investing in private assets or using third-party fund managers, as those practices make the TER less favourable.

Based on MBIE's consultation, industry views on whether to change the legislative approach to TER are mixed. Some providers want third-party private investment costs to be excluded from the calculation of the TER in order to incentivise greater investment in private assets. Others oppose any change, due to concerns that it would reduce transparency and potential value for money for investors. The FMA appears to side with the latter group, on the basis that removing third-party management costs from TER reduces transparency.

MBIE is interested to hear further from the sector as to whether calculation of the TER presents an issue, and whether any changes are required. At this stage, no specific proposals have been made.

There's plenty of time to submit

Investment into private assets has been a topic of conversation across the industry for some time, and we are pleased to see broader consultation being undertaken on the issue. The wide scope of the consultation, and the fact that MBIE has not made specific proposals for reform on a number of points, means that there is a genuine opportunity to shape the changes as they happen.

The consultation is open until 5pm on 14 February 2025, meaning there is plenty of time to make a submission in the New Year.

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