Institutional investment in private assets

There is no outright legal prohibition that prevents KiwiSaver providers investing in private assets in New Zealand. 

KiwiSaver providers have a broad discretion to invest KiwiSaver scheme assets, provided it is in accordance with the fundamental requirement to act in the best interests of investors and within any asset class or other limits they impose in their schemes’ Statements of Investment Policy and Objectives (SIPOs) (which are publicly available documents established and maintained for each scheme containing the scheme’s investment objectives and strategies). 

However, there are other features of KiwiSaver’s current legal and regulatory environment which may act as disincentives, discouraging providers from investing in private assets, with the result that KiwiSaver schemes as a whole are much less invested in private assets (as compared to the New Zealand Superannuation Fund (NZ Super Fund) or private sector retirement savings schemes in comparable jurisdictions). These features include: 

1. The need for liquidity to meet:
   1.  The account portability obligations contained in section 56 of the KiwiSaver Act 2006 (KiwiSaver Act), which require KiwiSaver providers to transfer members’ account balances from one KiwiSaver scheme to another within 10 working days of a request;
   2. members’ entitlements to various permitted early withdrawals as allowed under Schedule 1 to the KiwiSaver Act (the KiwiSaver Scheme Rules) (in addition to members’ withdrawals of their funds on and from their ‘KiwiSaver end payment date’), and the fact these entitlements cannot be waived (including with member consent); and
   3. the increasing expectations of the FMA for liquidity management in light of the duties in sections 143 and 144 of the Financial Markets Conduct Act 2013 (FMC Act), as described in the FMA’s Liquidity risk management good practice guide for ManagedInvestment Schemes6 (MIS Manager Liquidity Guidance), as well as the need for liquidity to meet switch requests from one KiwiSaver fund to another fund within the same KiwiSaver scheme (which could be partly addressed by KiwiSaver providers imposing a lock-in period or notice period for switches, if palatable to members and permitted by the scheme’s governing document); 
2. The requirements for daily pricing of assets contained in many existing scheme governing documents (in response to the need for liquidity outlined in paragraphs 2.3(a) above), which are more easily satisfied when investing in assets that are (or can be) priced daily; and 
3. The requirement that fees not be “unreasonable” in clause 2, Schedule 1 of the KiwiSaver Act, as interpreted in light of the FMA’s Managed Fund Fees and Value for Money guidance from April 20217 (VfM Guidance) and the manner in which fees are reported by the FMA and Sorted, which are perceived to encourage ‘low service/low fees’ products, ahead of those with more costly, complex investment decision processes. 

It is the role of KiwiSaver providers and their expert investment management teams to make investment decisions (including whether to prefer one asset class over another) in members’ best interests and in accordance with the relevant SIPO. However, where there are features of the legislative and regulatory environment which may impede or discourage KiwiSaver providers investing in long term assets in accordance with members’ best interests, then these issues should be considered by the Government for reform for those members seeking to invest for the long term. 

Read the full legal opinion here.