The NZ workplace savings market continued its slow fade-out to obscurity during the latest reporting year but the almost $26.5 billion sector has some life in it yet as well as more immediate challenges, according to a panel of industry experts.
Figures revealed in the recent Financial Services Council (FSC) online event show the traditional NZ superannuation fund universe – a broad space including stand-alone, master trusts and retail products – held $26.47 billion across 119 schemes on behalf of 262,940 members as at the end of the 2021 financial year.
Gavin Quigan, Financial Markets Authority (FMA) principal adviser for the restricted scheme sector, told the FSC audience that the old-school super industry remained largely stable over the previous 12 months.
However, the super market has been in steep decline since 2015 with scheme numbers almost halving from the 200 recorded at the time while member figures plummeted from 344,521, or over 80,000 above the current level.
Quigan said super funds under management had ticked higher, regardless, on the back of strong markets and generous workplace scheme contributions (that typically outdo the standard KiwiSaver 3 per cent minimum employer rate).
Providing an even deeper historical perspective, he said as at June 30, 1995 – his first reporting year with the now-defunct Government Actuary office – the super sector covered 1,584 schemes, including 1,447 stand-alone workplace and 137 retail funds serving a collective 672,000 members.
The introduction of KiwiSaver in 2007 hastened the slowdown of the already stagnant employer super industry in NZ; a trend compounded in 2016 when the sector was roped into the compliance-heavy Financial Markets Conduct Act (FMC) regime.
But Quigan told the FSC panel – part of the industry body’s COVID-interrupted annual conference digital solution – that the top-line figures masked an ongoing employer influence in the retirement savings choices of many New Zealanders.
“It’s gone under the radar but about 760 employer groups are represented in master trust products,” he said.
The NZ employer super master trust sector accounts for about $8.5 billion, split across six providers (due to shrink to four soon following the Fisher Funds purchase of Aon and the NZX buyout of the ASB product).
Quigan said there was further scope for master trust growth as smaller stand-alone employer schemes, in particular, sought to manage costs and responsibilities.
And employers are also holding greater sway in the KiwiSaver market, too, with a growing trend to strike ‘preferred provider’ deals with scheme operators.
He said about 15,000 employers now have preferred provider agreements with KiwiSaver schemes. Since inception of the regime more than 226,000 members have opted into KiwiSaver via their employer, according to Inland Revenue Department figures.
Employer-preferred schemes could ultimately water down the number of auto-enrolled members flowing to government-appointed default schemes. Unless new employees make a choice they will be allocated to their employer-selected scheme (if there is one) rather than shunted to the official default merry-go-round.
The FSC panel – chaired by Chapman Tripp partner, Mike Woodbury – also flagged a number of regulatory hurdles facing the employer super sector.
Woodbury said the industry body had made some progress on its “right-sizing” initiative aimed at easing the regulatory burden for restricted schemes, especially defined benefit funds.
He said some further exemptions should be in place early next year while others may require a legislative fix.
Importantly, Woodbury said the government had agreed to amend recent changes to the employer superannuation contributions tax (ESCT) that saw defined benefit schemes hit with the new top-level 39 per cent tax rate.
“We’ve urged the government to make the change [set to dial the defined benefit ESCT back to 33 per cent] retrospective to April this year,” he said.
The Chapman Tripp veteran also recommended the recent FMA volumes of KiwiSaver and retail funds industry guidance as relevant reading for the restricted scheme world.
Woodbury said the regulator’s ‘value for money’, sustainable investing and advertising guidance notes served as useful best-practice reference points for the restricted sector even though it remained exempt from formal compliance obligations.
For example, Quigan said the FMA ‘value for money’ principles could extend to master trust providers, prompting them to revisit “legacy” pricing plans and explore equitable fee schedules “across their whole books”.
“Some historical [master trust] fee structures have passed their use-by date, and they need to be brought more into the user-pays environment,” he said. “There’s some work to be done there for master trust managers.”
In news with wider resonance for the entire NZ managed funds industry, Woodbury also noted further work was afoot on resolving the vexed issue of GST on unit trusts.
Buried in a shallow grave in 2019 after at least six years of wrangling between industry and the Inland Revenue Department (IRD), government resurrected the GST zombie talks last year.
Woodbury said it appeared the IRD had narrowed down the policy choice to either making investment management fully-exempt from GST or “fully GST-able”.
However, he said any GST exemption was unlikely to extend to outsourced administrative services – one of the major sticking points of previous failed efforts.
An IRD decision was expected by the end of 2022, Woodbury said, with a transition period of two to three years to follow any GST treatment change.
Further consultation awaits…