Regulatory regime for KiwiSaver and CSFs

2007 changes have been made to the regulatory regime for KiwiSaver and CSFs (complying superannuation funds).

A number of changes have been made to the regulatory regime for KiwiSaver and CSFs.

A CSF is a registered superannuation scheme that has incorporated certain KiwiSaver rules - in particular, lock-in and portability. Employer contributions to CSFs are eligible for the exemption from SSCWT that is provided for KiwiSaver schemes. The rules applicable to KiwiSaver schemes apply in most part to CSFs. The Taxation (KiwiSaver) Act 2007 introduces further obligations for CSFs in this regard. The Act also introduces new obligations for CSF providers. These obligations address the unique position of CSF in the KiwiSaver environment.

KiwiSaver rules

The KiwiSaver rules found in Schedule 1 of the KiwiSaver Act establish the conditions of membership for any KiwiSaver Scheme. For example, it includes rules relating to the lock-in of funds, circumstances of early withdrawal and rules preventing unreasonable fees from being charged. These rules apply to CSFs through the definition of complying fund rules in section OB 1 of the Income Tax Act 2004. The Taxation Act further aligned the complying fund rules with the KiwiSaver rules. Specifically, the Taxation Act includes an amendment to the definition of complying fund rules that ensures that any CSF must allow the withdrawal of funds as a lump sum. The complying fund rules also ensure that no person may join a CSF if the person is over the age of eligibility for New Zealand superannuation. Regulation 21 of the KiwiSaver Regulations 2006 has also been amended to enable CSFs to establish a mortgage diversion facility.

Sections 196 and 101G of the KiwiSaver Act have also been included in the complying fund rules. Section 101G of the KiwiSaver Act 2006 (as implied into the definition of the complying fund rules) ensures that compulsory employer contributions to CSFs must be allocated to the investment profile chosen by members and be fully vested. It further requires notice to be sent by providers to the Commissioner two months before the member becomes eligible to withdraw his or her funds by reaching the age of eligibility.

Unreasonable fees

The definition of "complying fund" rules in section OB 1 of the Income Tax Act 2004 has been amended to include a reference to rule 2 in Schedule 1 of the KiwiSaver Act. This requires all CSF providers to ensure that the fees they charge for membership are not unreasonable. Breaching this rule will amount to a breach of section 35 of the Superannuation Schemes Act 1989 and may be enforced through the provisions in the Superannuation Schemes Act that allow the Financial Markets Authority to direct, de-register or order the wind-up of a scheme. The generic appeals processes in the Superannuation Schemes Act will also apply. An amendment has been made to section 40 of the Superannuation Schemes Act that enables a court to enforce the requirement that fees not be unreasonable.

Contribution rates

 The definition of CSF rules in section OB 1 of the Income Tax Act requires CSFs to make deductions from salary or wages that are equivalent to the minimum contribution rate specified in section 25(1)(d) of the KiwiSaver Act. This requires contributions to be made at 4 percent of an employee's gross base salary. The compulsory employer contribution must be made at the relevant rate, as prescribed in section 101D of the KiwiSaver Act. The compulsory employer contribution has been phased in over four years, increasing from 1 percent of an employee's gross salary or wage to 4 percent of gross salary in 2011. The complying fund rules have been amended so that the transitional rules that allow employer contributions to count towards the minimum contribution requirement also apply to complying fund members.

Transfers and insurance

Section 9D of the Superannuation Schemes Act 1989 has been amended to enable schemes that provide insurance benefits linked to superannuation accumulation to reduce those insurance benefits if a member elects to transfer their CSF accumulation to a KiwiSaver scheme. The insurance benefit may be reduced by an amount proportionate to the amount that is transferred out of the CSF to a KiwiSaver scheme. For example, if a CSF member has an accumulation of $100,000 and elects to transfer $50,000 of that accumulation to a KiwiSaver scheme, the CSF may reduce the life insurance benefit attached to that member's account by $50,000.

Successor agreements

To obtain CSF status, a registered superannuation scheme must satisfy the requirements for the scheme to be registered before 1 July 2007. Similarly, there are requirements that any employer participating in the scheme, must have entered into a participation agreement before 1 July 2007. To ensure that employers are not locked into agreements with a specific provider, the law enables successor participation agreements to replace any participation agreement entered into before 1 July 2007. Successor agreement will need to be established under the provisions in section 9BAA of the Superannuation Schemes Act.

Register of CSFs

Section 158 of the KiwiSaver Act has been expanded to enable the KiwiSaver register to include a sub-register of CSFs. The information recorded on the sub-register will be largely similar to the information recorded for KiwiSaver schemes, and will include contact details for trustees, the date of approval for complying fund status and annual financial balance dates. The details to be included in the register of complying funds are specified in section 161 of the KiwiSaver Act. The register applies from 1 April 2008.

Participation agreements

The new section 41 of the Superannuation Schemes Act requires all existing participation agreements relating to CSFs to be lodged with the Financial Markets Authority within 28 days. This provision only applies to employers that have already chosen to provide access to the CSF under a participation agreement. Further, section 34 of the Superannuation Schemes Act has been amended to include a requirement that, on application for approval as a CSF any relevant participation agreement providing access to the CSF section of the scheme must also be provided to the Financial Markets Authority.

Implied offer relating to transfers without consent

Section 9BAA of the Superannuation Schemes Act enabled a trustee or an employer to transfer members in a scheme or a specific class of members within a scheme to a new scheme when the terms of membership are no less favourable. An amendment has been made to this provision that deems an offer of securities to have been made by the relevant member and acceptance to have been tendered by the new provider if the application is successful. This does not nullify the requirements of the Securities Act to provide an investment statement, but simply recognises that a contract has been made between the parties. All providers will still be required to provide potential members being transferred with an investment statement for the new scheme.

 Notification of fee change

Amendments have been made to the KiwiSaver Act and the Superannuation Schemes Act to require trustees of a scheme to notify the Financial Markets Authority of any changes to the fees being charged to members in that scheme. Section 189B of the KiwiSaver Act and section 39 of the Superannuation Schemes Act require a trustee of a scheme to notify the Financial Markets Authority of any changes to the fees charged for membership in a CSF or a KiwiSaver scheme. A corresponding amendment to section 40 of the Superannuation Schemes Act and section 189C of the KiwiSaver Act has also been made that enables a court to enforce the "unreasonable fees" requirements. This amendment has replaced the provisions in clause 2 of Schedule 1 of the KiwiSaver Act that allowed enforcement by the courts. The prohibition against unreasonable fees, however, is still contained in clause 2 of Schedule 1 of the KiwiSaver Act.

 Responsible investment

New section 205A has been introduced to require all KiwiSaver schemes and CSFs to disclose their approach to responsible investment. The disclosure of this approach must be in the form required by the KiwiSaver Act. The Act specifics that the disclosure must be in the investment statements of the scheme and must be included at the end of the "who is providing it for me?" section of the investment statement. The disclosure statement must be in the form prescribed by the section. Failure to comply with this requirement is treated as a failure to comply with the Securities Regulations 1983. This allows the Securities Commission to monitor and enforce compliance with this provision.

 Definitions of "independent trustee"

The definition of "independent trustee" in clause 4 of the KiwiSaver Act has been amended to remove the requirement that the trustee be independent from the administration and investment managers of the scheme. The amendment allows trustees that are performing these back-office functions themselves to continue operating as trustees of the scheme. The amendment applies to both trustees and related companies of trustees. Further, requirements for independence from employer contributors have been removed. Technical amendments have also been made to the definition of "independent trustees" to clarify that only one director of a trustee corporation will need to satisfy the requirements for independence.

Investment adviser

An amendment has been made to section 206 of the KiwiSaver Act to provide that a person is not an investment broker if they merely exercise a function, duty or power under the KiwiSaver Act.