MinterEllisonRuddWatts, Chapman Tripp contribute to CSF legal opinion

MinterEllisonRuddWatts and Chapman Tripp have contributed to a legal opinion commissioned by the Centre for Sustainable Finance (CSF) to identify the regulatory and legal disincentives that discourage KiwiSaver providers from investing in private assets.

These disincentives had potentially restricted New Zealanders from accessing investment opportunities that could offer higher financial returns and deliver positive environmental, social, and economic impacts over the long term. The report pitched legislative and regulatory changes that would eliminate some of these disincentives.

“Leading investors globally see the value of private asset investments as part of diversified portfolios. Both the government and KiwiSaver providers can take further action to ensure KiwiSaver members benefit from a greater range of options than they currently have”, CSF chair Bridget Coates said.

The opinion revealed that under 2% of KiwiSaver's $97bn fund was currently invested in unlisted shares, “far less than retirement savings scheme providers in other jurisdictions and out of step with leading investors globally, which typically invest in a diverse range of asset classes”, according to a joint media release by MinterEllisonRuddWatts, Chapman Tripp and CSF. By contrast, 18% of superfunds in Australia go into private asset investment.

MinterEllisonRuddWatts senior partner Lloyd Kavanagh, who co-authored the opinion, noted that New Zealand “trails well behind other countries, such as Australia, both in the proportion of retirement savings invested in private assets, and the returns earned by those retirement savings”.

"At a time when New Zealand needs large amounts of capital to build sustainable infrastructure, it seems unfortunate that some of the KiwiSaver regulatory settings are having the unintended consequence of discouraging some providers from investing in private assets”, he said. “Modifying the legal and regulatory environment to reduce those disincentives would serve a dual purpose of delivering better long-term value to KiwiSaver members and providing local capital to build much-needed infrastructure – especially to meet the risks and opportunities presented by climate change”.

Chapman Tripp partner and opinion co-author Tim Williams pointed out that the transfer and withdrawal settings under the existing KiwiSaver framework limited investors’ choices because all investor funds needed to be available at any time to meet transfer and permitted withdrawals. Thus, customers could not opt to commit funds to be held without transfer or early withdrawal options to gain access to long-term investments.

The legal opinion outlined the three main barriers to private asset investments for KiwiSaver managers:

• the necessity for adequate liquidity to cover account portability obligations and member withdrawal entitlements
• the need for daily asset pricing
• Unclear definition of the reasonable fees requirement

The opinion proposed the following changes to address these barriers:

• allowing investors to opt out of account portability and early withdrawal entitlements, addressing the liquidity bias
• permitting the establishment of “private asset” funds with long-term investment horizons
• efficient accommodation and adoption of long-term asset valuation methodologies into KiwiSaver scheme trust deeds
• increased FMA recognition that higher fees are “legitimately associated with private assets, including clarification of the requirement that those fees not be ‘unreasonable’ ”

"The legal opinion highlighted legal impediments, but it also pointed out there were no specific legal barriers. In fact, several KiwiSaver providers were already providing these options to their members," Coates said.

Williams added that while private asset investment “won’t suit every investor, nor will it necessarily be something all KiwiSaver providers offer”, “some investment choices present in the broader New Zealand financial markets, and internationally, are not being provided through current KiwiSaver scheme options, narrowing the risk and return diversification choice available in the KiwiSaver scheme universe, including the opportunity to provide needed capital for New Zealand’s development”.

The legal opinion expounded on the CSF's Investing in Private Assets Recommendations paper released by CSF last year. The paper had advocated for policy certainty for KiwiSaver managers.