Lock-up vs liquid: why a KiwiSaver cornerstone could change

Financial services sector participants are weighing up the pros and cons of tweaks to regulation which could potentially pave the way for more KiwiSaver investment in private assets like unlisted infrastructure or private businesses, with the government now considering submissions on a range of options.

One of those would allow KiwiSaver providers to opt out of "portability" requirements for funds so long as their intentions are clearly laid out in the provider’s PDS. Providers could then use liquidity management tools such as side-pocketing or redemption gates and withdrawal limits to allow for investment of funds in private assets which generally have longer horizons of 5-10 years.

“The trade-off here is that by essentially locking-up assets, either through what they call side-pocketing or redemption gates, by allowing that, you're eroding the simplicity of KiwiSaver and potentially risking a little bit of loss of public confidence,” says Buddle Findlay Senior Associate Andrew Suggate, who specialises in financial services law.

“The ability to take it out, to buy a home, if it's your first home, or to transfer it to another fund you like better, that makes people feel like they've still got control over it.

“I think they just need to exercise caution on anything that's going to restrict that and maybe affect the public perception of KiwiSaver. And maybe people would accept it and think, ‘oh, that sounds perfectly fine’, but maybe not, it's a bit of an unknown.”

Members need to know what they are getting into

An alternative being floated and met with some support, is to allow for a specific private asset fund type within a KiwiSaver scheme, which would need to be clearly labelled with what its selection means for members’ ability to withdraw or move their funds around. Although liquidity management tools such as side-pocketing and redemption gates would also be opt-in for members, a specific fund type would make it clear if anywhere between 2-20% of their funds would be locked-up in a long-term investment.

Looking at the success of super private asset funds in Australia, Simplicity Chief Economist Shamubeel Eaqub says it is something New Zealand must seriously consider.

“We don't really have an infrastructure asset class, so I'd like us to have the choice for people to invest in.

“As for who should and who shouldn’t invest and how much they should invest in this asset class, I can't answer that, because I think that is quite personal.

“I imagine over the coming decades, we're going to see a significant shift in how much mix and match goes into people's KiwiSavers.”

In a joint legal opinion on the options, MinterEllisonRuddWatts and Chapman Tripp outlined concern for the need for transparency where members are committing their funds to be locked up for a longer period with potentially higher returns. Although the firms note the concept shouldn’t be too difficult to explain given the familiarity people have with offers like long term and on call deposits.

Andrew Suggate, of Buddle Findlay, agrees education and advice will be key to members’ understanding.

“Given the kind of quite well publicized low levels of financial literacy in New Zealand, are they really going to understand in advance that potentially a percentage of their funds is going to be locked up in a side pocket or is not going to be available when they want it?”