Changes to the treatment of KiwiSaver and superannuation schemes in the Financial Markets Conduct Bill will simplify compliance and make for a more pragmatic regime.
We track the main amendments to emerge from the select committee process and provide a brief commentary.
Purpose of superannuation scheme
The Bill will still require that - as a general rule - the sole, as opposed to the principal, purpose of a registered superannuation scheme must be to provide retirement benefits.
Officials’ advice to the Commerce Committee (the Committee) is that the current law in this area is too loose and “out of step with the rest of the world, which [has] stronger lock-ins and tighter purposes”, placing New Zealand schemes under question for overseas recognition and portability purposes.
A scheme with other purposes not “merely incidental” to providing retirement benefits must be registered as a standard managed investment scheme.
However, the Committee has recommended some changes to soften the application of this rule:
- an existing registered superannuation scheme (or a section of that scheme) that is closed to new joiners can continue operating under the current “principal purpose” restriction, and
- a “prescribed workplace scheme” (to be defined by regulation) can retain, as a stand-alone purpose, paying benefits when members leave the employment of the relevant employer or industry.
The first of these facilities will enable a superannuation scheme (including a retail scheme) to “grandfather” the more permissive early withdrawal provisions in place for existing members and prescribe (in a new section) more restrictive entitlements for new joiners which meet the sole purpose test.
Workplace schemes may need to invoke both exceptions in order for current in-service withdrawal facilities to remain available to existing members. The Bill allows early withdrawals in limited circumstances, or according to limited criteria, that are defined in trust deeds. However, each such facility must as a general rule be “merely ancillary” to the sole purpose of providing retirement benefits.
Related amendments clarify that permitted withdrawals from KiwiSaver schemes are not inconsistent with the sole purpose test. They might usefully also have prescribed a similar exception for KiwiSaver-consistent early withdrawals offered by other superannuation schemes.
Any application for registration of a managed investment scheme as a superannuation scheme must be accompanied by a certificate from the Financial Markets Authority (FMA) that it is satisfied the scheme complies with the applicable withdrawal restrictions.
New Zealand criteria
The Bill is now clear that for all KiwiSaver and superannuation schemes, the “New Zealand criteria” apply only “on entry” and do not apply with respect to later transfers between schemes.
The criteria will be more liberal for superannuation than for KiwiSaver schemes. It will be permissible to join a superannuation scheme if employed on New Zealand terms and conditions by a New Zealand-resident employer (without having to be a citizen or entitled to permanent residence).
Related party investments by restricted schemes
The proposed 5% limit on investments by restricted schemes in related parties of, or participants in, those schemes has been retained. The terminology now used to describe such an investment is an “in-house asset”, meaning a scheme asset which is:
- a loan to or an investment in, or
- subject to a lease or lease arrangement with
a related party of the scheme or a scheme participant (or an associate of either of them).
However the proposed rules have been relaxed as follows:
- in-house assets will no longer be aggregated when testing compliance with the 5% limit (in-house assets relating to persons who are not associated with each other will count separately, such that there will be no breach if each such investment is below 5%)
- the 5% restriction will initially apply only to new investments made after the date when the legislation takes effect
- schemes will then have three years from that date to ensure that no in-house asset exceeds 5% of scheme assets, and
- employer contributors will be treated as related parties only in the case of specified employer-related schemes.
The Bill also now prescribes that (among other new exclusions) in-house assets exclude investments in other registered schemes or prescribed overseas schemes.
We had submitted that the 5% limit should be expressed in benchmark (not actual) asset allocation terms to avoid inadvertent breach. The Bill now provides that a scheme’s in-house assets ratio must be calculated in accordance with FMA-notified frameworks and methodologies, which officials consider can address that concern.
These changes will make the related party investment restrictions workable for more restricted schemes than before, and others will now be able to seek exemptions as soon as the Bill becomes law, or will at the very least have more time to comply.
Other compliance relief
New provisions concerning the content of governing documents will lessen the level of prescription that was to have been required in scheme trust deeds in areas such as contribution requirements and asset valuation methodology.
Indemnity protections will now be permissible, as we had urged, for:
- managers’ non-negligent breaches of trust deeds, SIPOs or their issuer obligations, and
- supervisors’ non-negligent failure to remedy issuer contraventions or act in accordance with special resolutions by scheme participants.
Indemnity protections will also now be permissible for investment managers in a wider range of circumstances, including non-negligent SIPO breaches.
A restricted scheme will need an external custodian only where it does not have a corporate trustee or use for investment purposes a nominee company with the scheme’s trustees as its directors. Natural person trustees may need to incorporate, or establish nominee companies, in order to continue holding scheme assets.
We welcome the unheralded but long-overdue amendment allowing the supervisor or trustee of a registered scheme to “make a partial distribution of assets of the scheme at any time before a copy of the full financial statements [prepared as at the wind-up date] is sent to the FMA” (unless prohibited by the trust deed).
This addresses a key concern relating to superannuation scheme wind-ups and we urge that it be made available as soon as the Bill is enacted.
No doubt with a view to avoiding difficulties of the kind which arose for some of this year’s KiwiSaver governance changes, the transitional provisions for FMA-approved trust deed amendments now expressly allow changes which, although not related to ensuring compliance with the new legislation, are otherwise permitted by law.
Other, mostly technical or corrective, amendments to the Bill show a welcome pragmatism which will simplify compliance.