The Minister of Commerce and Consumer Affairs has announced consultation on proposed changes to aspects of New Zealand's capital markets to:
- Change KiwiSaver requirements to enable greater scope for KiwiSaver funds to invest in private assets
- Adjust the mandatory climate-related disclosures regime to increase reporting thresholds and reduce director liability and to consider requiring overseas parent company reporting.
The stated aim of these reforms is to seek to address New Zealand's long-term productivity challenges and enhance economic growth by strengthening our capital markets.
The proposals and submission details are available on the Ministry of Business, Innovation & Employment's (MBIE) website, with consultation closing on 14 February 2025.
Consultation on KiwiSaver changes
MBIE is considering changes to the rules around KiwiSaver to make it easier for KiwiSaver funds to invest in private assets, where this is in the best interest of investors.
MBIE's discussion document (Document) outlines how most funds in KiwiSaver schemes are currently invested in listed 'public' assets, with only a low proportion (2-3%) of funds being invested in unlisted 'private' assets. Investment in private assets has the potential to benefit members through a broader range of investments, diversifying risk and potentially generating higher returns, and to benefit New Zealand businesses and the wider economy through improving access to capital.
The Document focuses on possible solutions to KiwiSaver settings seen as inhibiting private asset investment:
- Enabling KiwiSaver providers to use liquidity risk management tools: Liquidity is a particular challenge for KiwiSaver funds due to the scheme's transferability across providers and withdrawal provisions. Private assets are typically less liquid than public assets. The Document proposes developing changes to the KiwiSaver regime to allow for additional liquidity risk management tools such as:
- Side pocketing: allowing for the placement of illiquid or temporarily devalued assets into a separate account until their value/liquidity has improved
- Redemption gates: allowing a fund manager to carefully control withdrawals from a fund over a period of time, including by slowing or halting withdrawals. This could potentially be enabled through an 'opt-in' model with members.
The Document seeks feedback on these proposed changes and notes that in practice any such changes will likely require clear disclosures and communication of how such tools may work, as well as choices for members whether to opt in or out.
- Improving private asset visibility in disclosure requirements: Under existing requirements fund managers are required to disclose fund assets by category. Private assets do not fit well into existing categories and are therefore included inconsistently within existing different categories ('Australasian equities', 'New Zealand fixed interest', etc). Clearer disclosure of private asset investments may help establish the grounds for higher fees resulting from the higher cost profile of private asset investments and may also support more readily comparable information between funds. The Document seeks feedback on four possible approaches to greater disclosure of private assets, from creating a new separate category to adding additional sub-categories.
- Ensuring valuation requirements support private asset investment: The Document notes that in practice KiwiSaver funds are required to price assets on a daily basis so that they can process transfers and withdrawals at any time, however largely illiquid private assets are often valued on a quarterly or longer basis. Making changes to governing documents to permit different valuation methodologies presents challenges for managers, and the Document seeks feedback on proposals for how to allow KiwiSaver providers to modify their trust deeds to allow for valuation practices that support investment in private assets, including by amendment to the Financial Markets Conduct Act 2013 (FMCA).
- Consideration of total expense ratio formula: The Document notes legislative requirements to disclose total expense ratios (TER) of funds, including costs in relation to private asset investments, which may act as a disincentive to private asset investment for some managers in order to keep TERs low. It also notes concerns from other industry participants and the Financial Markets Authority regarding changes that would reduce transparency and comparability of fees. Accordingly, no option is proposed as MBIE seeks further feedback on this issue.
See our views on the proposed KiwiSaver changes at the foot of this article.
Consultation on climate-related disclosures (CRD) changes
New Zealand's CRD regime was introduced by the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021. The regime requires climate reporting entities (CREs) to prepare annual climate statements disclosing their climate-related risks and opportunities in accordance with standards issued by the External Reporting Board (XRB).
The Government has opened a public consultation regarding potential adjustments to the CRD regime, in relation to reporting thresholds, director liability settings and multinational corporation filing requirements.
Listed issuer and investment scheme manager reporting thresholds
The Government has received feedback that the cost of reporting is excessive and disproportionate, and the regime is focusing on compliance over positive actions to prepare businesses for the impacts of climate change. Noting also that assurance is required for greenhouse gas emissions disclosures for financial years ending on or after 27 October 2024, which may add another significant cost burden on CREs.
Some stakeholders have stated that the reporting threshold for listed issuers is too low, with the current threshold of market value of listed securities of $60m being lower than equivalent thresholds currently in place in Australia, resulting in a competitive disadvantage for New Zealand versus Australian listings. Consequently, the consultation proposes options for raising the New Zealand threshold for listed issuers, including up to $550m in market capitalisation.
Similarly, stakeholders have expressed their concerns that the thresholds for investment scheme managers are too low and not aligned with Australia. In New Zealand, managers of registered investment schemes with greater than $1b in total assets under management as at their two preceding year-end balance dates are captured as CREs. In Australia the requirements apply to individual schemes with more than $5b in assets under management before reporting is required. Consequently, the consultation proposes options for raising the New Zealand threshold for investment scheme managers to $5b in total assets under management (ie. per manager) or to $5b per scheme. The paper also considers whether threshold requirements should be located in legislation or able to be changed at the discretion of the Minister (within set parameters).
Director liability settings
Due to director liability settings, there has been feedback that CREs have been taking a very risk averse approach to reporting, which is contributing to high external legal and consultancy costs. Further, directors have been reluctant to include detailed or material information in climate statements due to concerns about personal liability in doing so.
Consequently, the consultation sets out options to amend the FMCA so that section 534 no longer applies to CRD reporting (which relates to deemed liability for directors where a CRE has contravened CRD obligations), amend the FMCA so that directors can no longer be liable for aiding and abetting an unsubstantiated representation or to introduce a temporary safe harbour provision or modified liability provision to protect CREs and their directors from civil actions for a period of time.
Filing parent company climate statements in New Zealand
Currently, New Zealand subsidiaries of multinational companies do not file climate statements in New Zealand unless those subsidiaries fall within the definition of a CRE. MBIE is proposing a register where New Zealand subsidiaries of multinational companies could file their parent company climate statements in New Zealand (although the CRD regime discussion document notes challenges with this approach).
Our views on the KiwiSaver and climate-related disclosures proposals
KiwiSaver changes
There is much detail to be confirmed in relation to these changes. While improving economic performance, access to capital and the depth of New Zealand's capital markets are laudable policy aims, generating returns to support members' retirement goals is the primary purpose of the KiwiSaver regime – for example the purpose statement in section 3 of the KiwiSaver Act states "to increase individuals’ well-being and financial independence, particularly in retirement, and to provide retirement benefits". Any changes in relation to private assets will need to be first and foremost of demonstrable benefit to members, which we expect will be front of mind for MBIE in developing its final policy recommendations.
Climate reporting
It is positive to see that the government has considered the concerns expressed by New Zealand businesses and is proposing actions align more closely with international practice, and in particular our closest comparator country Australia. It is essential for New Zealand to strike the right balance between promoting investment in New Zealand businesses, competitiveness and economic growth while encouraging a transition to a low-emissions economy and transparency of climate information to support decision making.
What do I need to consider?
All KiwiSaver managers and CREs should review the consultation papers and summary of the discussion documents and consider whether to make a submission, noting that the deadline for submissions is 14 February 2025.
If you would like assistance with understanding the proposed changes or the implications for your business, please contact a member of our financial services team.
This article was co-authored by Andrew Suggate (senior associate) and Nicole Tan (solicitor).
