WSNZ Action 2016 Issue 1

Welcome to our first issue of WSNZ Action for 2016.

In this issue:


Legislative Issues

Below we set out a high-level update on a range of Financial Markets Conduct Act 2013 (FMCA) transition issues as they affect workplace savings schemes.  We will keep members informed of progress on each as more details emerge.

 Licensed Independent Trustees – ‘Independence’ Requirement
As a number of you will be aware, we and others have been helping pursue solutions to some difficult issues concerning the practical ability of restricted schemes to comply with the Licensed Independent Trustee requirement when they have a sole corporate trustee.

Difficulties in terms of complying with the ‘independent’ test in section 131(3) of the FMCA have arisen where:

  • the scheme’s administration manager, or an investment manager, is in the same group of companies as the corporate trustee; or
  • the trustee is a related body corporate of an employer sponsor; or
  • the Licensed Independent Trustee acts for related restricted schemes one or more of which has a sole corporate trustee.

The Financial Markets Authority (FMA) has agreed to grant a class exemption addressing each issue.  This exemption will ensure that a Licensed Independent Trustee who is in substance independent is not treated as failing the independence test due simply to being a director of a sole corporate trustee that is related to a sponsoring employer or an administration or investment manager.

The exemption, for which we thank and commend the FMA, recognises that the independence of a Licensed Independent Trustee who is on the board of a corporate trustee should be considered without taking into account the corporate trustee’s relationships.

It will remain the case that the Licensed Independent Trustee must be otherwise independent of any employer (or a related body corporate of an employer), the administration manager and every investment manager.

FMA will publish a more detailed explanation when the exemption is issued (which we understand will be as soon as practicable).  For more detail in the meantime, a copy of the FMA’s consultation paper from earlier this year is here.

MBIE will consider also clarifying the FMCA itself in this regard. However, as FMA is planning to issue an exemption, MBIE has advised that this is not a priority for the near term.

 Multi-Employer Schemes – Disclose Registration Requirements
As the law stands:

  • under the Financial Markets Conduct Regulations 2014 (FMCR), every plan-specific supplement to a multiple-participant scheme’s main product disclosure statement must be lodged on the Offers Register; and
  • every participation agreement which governs a plan and accordingly forms part of the scheme’s trust deed must be lodged on the Schemes Register.

We and others have expressed process, commercial sensitivity, privacy, cost and documentary overload issues relating to both of those Disclose Register upload requirements.

We are working with MBIE and FMA in relation to these issues (and we will keep affected schemes informed as the issues are progressed).   

 Wholesale Scheme Investments as ‘In-House Assets’ – Exemption Regulation

The FMCA prohibits a restricted scheme acquiring any new ‘in-house asset’ if, as a result, it would have or increase an ‘in-house assets ratio’ of 5% or more in relation to any related party (or its associated persons).  It also requires that by 1 December 2017 the scheme must have sold down any pre-existing in-house assets held in relation to a related party (or its associated persons) to the 5% level or below.

It has generally been accepted that an ‘in-house asset’ is an investment in a managed investment scheme which:

  • is not registered under the FMCA (i.e. is an unregistered wholesale scheme); and
  • is managed by a related party of the restricted scheme (this includes an investment manager, an administration manager, the sponsoring employer in an employer-related scheme, and an associated person of any of them).

MBIE has acknowledged that exemption relief is appropriate so as to facilitate such investment arrangements (which are common).  MBIE is working on exemption regulations that will allow investments in an unregistered scheme operated by a related party of a restricted scheme if appropriate related party controls are in place, with a specific focus on the assets of sponsoring employers (and their associates). The overall in-house asset ratio of 5% will still apply to the assets of the restricted scheme.  

The wording of this very welcome proposed exemption has yet to be confirmed, but we are advised that it will likely be broadly consistent with what was advised in a March 2016 consultation paper issued by MBIE.  The timing remains unclear (but we are assured all are aware of the relative urgency).

 Some other FMCA issues affecting workplace schemes

Schemes closed before 1 October 1997

We have expressed concern about the technical non-availability of the FMCA transition provisions in Part 2 of Schedule 4 to the FMCA to superannuation schemes which:

  • closed to new joiners before 1 October 1997 (when the Securities Act 1978 was extended to superannuation schemes);and
  • have accordingly never offered securities requiring either an investment statement or prospectus.

As matters stand, such schemes cannot transition and the issue affects a number of schemes, including closed retail schemes.

We understand that MBIE is progressing a remedy and we want to assure schemes that this issue is technical in character (and there is no cause for concern).

General
Other matters on the MBIE ‘issues list’ on which we are keeping a close eye include (among others):

  • extending the fund updates compliance relief given to restricted schemes (allowing fund updates to be annual, not quarterly, and a little less detailed) to all retirement schemes which are closed to new joiners but have chosen not to be restricted; and
  • removing barriers to legacy superannuation scheme mergers after 1 December 2016, by dis-applying the new Superannuation Scheme Rules in relation to FMCA-approved inward transfers.

 KiwiSaver

Pending KiwiSaver Act changes

In our last WSNZ Action we detailed (see here) some proposed KiwiSaver Act amendments dealing with:

  • improved electronic information sharing between Inland Revenue and KiwiSaver scheme providers with respect to members who transfer between schemes;
  • introducing a special-purpose opt-out facility for persons who, as minors, were incorrectly auto-enrolled or treated as having opted in to KiwiSaver through an employer; and
  • excluding from ‘salary or wages’ certain benefits received by employees from share purchase schemes.

The relevant Bill (the Taxation (Transformation: First Phase Simplification and Other Measures) Bill) had its Second Reading on 12 April 2016.

QROPS
We continue to monitor progress (which is frustratingly slow) on the issue of addressing the removal of the facility to transfer UK pension moneys to (and between) KiwiSaver schemes under the revised QROPS rules.  We also continue taking an active interest in what can be done under FMCA to enable on-market superannuation schemes to conform to the QROPS rules for relevant new joiners.

Another QROPS-related issue concerns withdrawals made to pay foreign superannuation withdrawal tax and the potential for UK penalties for members in some cases. Inland Revenue is in contact with the UK tax authority (HMRC) in relation to that issue, and we will endeavour to keep members informed as to progress.

Lost Super in Australia
One of the initiatives announced in Australia’s Federal Budget last year was a law change to allow a person’s unclaimed superannuation monies (USM) to be transferred direct from the Australian Tax Office (ATO) to a KiwiSaver scheme.

Currently, while retirement savings can be moved between an APRA-regulated Australian superannuation scheme and a KiwiSaver scheme, individuals with USM accounts held by the ATO cannot transfer those moneys direct to KiwiSaver.

No draft legislation has thus far emerged and it appears that this proposal may have stalled.  We are seeking an update and will keep you informed.


 KiwiSaver and Bankruptcy

Over the past several months we have exchanged some usefully informative and constructive correspondence with the Insolvency and Trustee Service at MBIE regarding KiwiSaver schemes and member bankruptcies.

The basis for the correspondence was that the Trustees Executors v Official Assignee decision (a bankrupt’s KiwiSaver interest is prevented from vesting in the Official Assignee) has had certain additional consequences not contemplated by the Court of Appeal.

Some points clarified
In summary terms, we can now clarify for scheme providers the Official Assignee’s position on several key points:

  • information requests: section 171 of the Insolvency Act 2006 continues allowing the OA to obtain documents and information with respect to a bankrupt member’s KiwiSaver interest - managers will continue receiving and must comply with section 171 notices;
  • standard section 171 notice: the OA will issue a standard letterto any known KiwiSaver scheme provider shortly after a member is made bankrupt, requesting information about:
    • transactions meeting certain criteria that may indicate an intention to defeat creditors; and
    • any proposed transactions that may result in funds being paid to bankrupt member;

and that letter should be regarded as having continuing effect throughout the bankruptcy;

  • payments from accounts: the TEL v OA protection does not extend to amounts to be paid to a bankrupt member from his or her KiwiSaver account – the funds vest in and must (except potentially as outlined below) be paid to the OA so:

‘It would therefore be appropriate for [the provider] to ensure that a bankrupt member is aware of the consequences and is given an opportunity to reconsider their request before it is processed’;

In other words the provider should make sure (in relation to a payment request of any kind) that the member is aware the funds will need to be  paid to the Official Assignee, and should allow the member to withdraw the request if he or she had not realised that this would be the result.                                                     

  • serious illness or significant financial hardship: if a withdrawal is sought on either ground, that may be material to any application the bankrupt member may wish to make (under section 163 of the Insolvency Act) for the OA to allow a payment to the member or any relative or dependant for support – the OA’s spokesman has advised:

‘I anticipate that in most cases there would be good grounds for [the OA] to make a corresponding allowance to the bankrupt under s 163 Insolvency Act, although it would of course be necessary for the Assignee to independently exercise that discretion before authorising payment of any funds to the bankrupt.’

Serious illness and hardship withdrawals – process suggestions
As to the last of these issues, whether an allowance (corresponding to the amount withdrawn) is to be made will necessitate a factual analysis before a discretionary decision is made, so:

‘As the information provided with an application to the KiwiSaver provider will inform that decision, the Assignee suggests that [providers] forward applications on to the Assignee in the first instance so a decision can be made.  This will avoid the need for the member to make two applications and for separate enquiries to be made by the Assignee.  The outcome should be that pre-approved payments can be made directly to members.  The need for urgency could be addressed in cases of serious illness, as you suggest.

To facilitate this process the Assignee could create a dedicated email address for KiwiSaver enquiries which all providers can use.  This will be monitored by suitably-trained staff who should be able to deal with all queries and applications in a timely and consistent manner.’

We are taking the Official Assignee up on the dedicated email address proposal and will advise KiwiSaver providers once that is confirmed.

Death
One remaining area of uncertainty in the KiwiSaver bankruptcies context concerns withdrawals after a bankrupt member has died.  Bankruptcy continues after death, but it is unknown (without court direction) whether funds paid to an estate will then vest in the Official Assignee or remain in the estate.

The Official Assignee has advised that it will clarify the position in relation to such payments at the first opportunity but in the meantime ‘it is important that providers understand the need to forward any applications for withdrawal to the Assignee so the recipients can be contacted with a view to resolving issues over how the funds should ultimately be distributed’.            


 Annual Report

The Workplace Savings NZ Annual Report as at 31 December 2015 is available online (click here to view).

This ‘new look’ Annual Report outlines our activities in 2015 in relation to legislation and regulatory reform.  It also reports back on both our ‘Retirement Incomes and Change’ National Forum in Wellington and the 2015 Communication Awards (as well as our other activities and those who contributed to them).

Do take a look!  We would welcome any feedback.