Big law firms identify legal and regulatory obstacles detering KiwiSaver providers from investing in private assets

MinterEllisonRuddWatts and Chapman Tripp have identified key legal and regulatory obstacles detering KiwiSaver providers from investing in private assets.

The law firms were commissioned by the Centre for Sustainable Finance (CSF) to provide a joint legal opinion after a technical working group paper by the CSF on the subject was quietly released last year.

The working group's paper found New Zealanders could be missing out on investment opportunities offering greater financial returns - leading to positive long-term environmental, social, and economic impacts – because of regulatory obstacles deterring KiwiSaver providers in the private assets space. 

Key barriers and challenges identified by the CSF last year ranged from policy certainty and regulatory clarity, KiwiSaver managers’ capacity to capability, organisational and market challenges posed by private assets and KiwiSaver members’ expectation and financial literacy.

Jo Kelly, the CEO of the Centre for Sustainable Finance, says the paper was focused on the range of those factors that if addressed, would bring New Zealand “into line” with leading investment practice globally.

“It’s about making sure that New Zealanders and KiwiSavers have the full range of options available to them, especially as predominantly long term investors with longer horizons,” she says.

The investor-led technical working group that contributed to last year’s CSF paper consisted of centre partners ANZ, ASB and BNZ as well as Harbour Asset Management, Milford Asset Management, Te Rūnanga o Ngāi Tahu, NZ Growth Capital Partners, Pathfinder, Tauhara North No.2 Trust and Foundation North.

The centre then commissioned law firms MinterEllisonRuddWatts and Chapman Tripp in late 2023 to look at the “legal impediments” of the paper’s research following the paper’s quiet publication last May.

Although a number of KiwiSaver investment managers invest in private assets, MinterEllisonRuddWatts and Chapman Tripp’s joint legal opinion released on Thursday identifies three key points they say actively discourage a large proportion of providers:

• The need for sufficient liquidity to meet account portability obligations and member withdrawal entitlements
• The requirement for daily pricing of assets
• Lack of clarity around the requirement for fees not to be ‘unreasonable’

“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,” says Lloyd Kavanagh, senior partner at MinterEllisonRuddWatts.

According to Chapman Tripp’s Tim Williams, the existing KiwiSaver framework limits investor options due to its transfer and withdrawal settings.

This discourages investment in private assets by mandating that all investor funds remain accessible for transfers and permitted withdrawals at any time. 

“Customers are currently unable to elect to commit their funds be held without transfer or early withdrawal options to access long term investments for greater diversification, to seek better potential returns or to meet their alternative investment preferences,” he says.

The Financial Markets Authority’s 2022 annual report says less than 2% of the $97 billion in total value of KiwiSaver funds in New Zealand are invested in unlisted shares.

The CSF says this percentage falls significantly behind retirement savings scheme providers in other countries and doesn't align with global leading investors, who commonly diversify their investments across various asset classes.

As a comparison, 18% of Australian superfunds are invested in private assets, compared to New Zealand’s 2%.

“It's really striking when you look out in the world and you look at how other countries’ long term savings, their retirement savings, are deployed,” Kavanagh says.

“New Zealand fund managers don't like private assets for some inherent reason.”

No sledgehammer

Kavanagh says modifying the legal and regulatory landscape to reduce private assets disincentives in KiwiSaver would achieve a dual objective – deliver better long-term value to KiwiSaver members and facilitate the investment of local capital into essential infrastructure projects, particularly those aimed at addressing the challenges and opportunities posed by climate change.

“New Zealand is not able to build the infrastructure that we need both to mitigate climate change and also adapt to climate change,” he says.

“If there are sustainable returns, then we should have private sector capital weighing in.”

The Centre of Sustainable Finance’s Jo Kelly says there isn’t just one clear “sledgehammer solution” that can improve the rate of KiwiSaver funds being invested into private assets.

“We have curious managers doing this type of investment in the New Zealand market. So it's not that you can't. It's just that there are some behavioral nudges that we need to sort of open up.”

She adds that the new Commerce and Consumer Affairs Minister Andrew Bayly wanting to review current KiwiSaver settings is a “positive step”.  

“There's work to be done on both sides. There's some adjustments that can be made on the government side, and then there's also some investment choices that can be made by KiwiSaver managers who may choose to engage in this type of investment depending on the interests – essentially priorities – of their members.”