The New Zealand workplace savings market looks set for further consolidation as the costs of regulation finally sink in, according to Gavin Quigan, Financial Markets Authority (FMA) KiwiSaver and superannuation schemes manager.
Quigan told the Financial Services Council FSC)/Workplace Savings NZ (WSNZ) conference in Auckland last week that the traditional employer super market – already thinned-out following the Financial Markets Conduct Act (FMC) transition last year – would likely shrink further.
“I expect trustees at the smaller end of the market – especially defined contribution [DC] schemes – would be looking closely at the costs [of operating under FMC],” he said. “They will have to ask is this the best outcome for members and who is funding those costs.”
Quigan said the raft of new reporting requirements imposed under FMC – even given some exemptions provided to employer super funds under restricted scheme rules – imposed a hefty burden on trustees.
As well as annual report obligations, restricted schemes still face quarterly and other “continuous” reporting burdens that require a higher level of governance and oversight than the majority experienced pre-FMC.
Super industry veteran and one of the 35 licensed independent trustees (LITs) operating under FMC regulations, Tim McGuinness, said of the 80 or so employer schemes still in play about half had assets under $25 million.
“There’s now a small number of large schemes that hold the bulk of the [78,000 or so] members of employer schemes,” he said.
McGuinness, who co-hosted the FSC/WSNZ conference session along with Quigan and Chapman Tripp partner, Mike Woodbury, said 34 of the 78 post-FMC employer schemes offered pure DC models with the remainder defined benefit (DB) or hybrid schemes (with a DB component).
Quigan said the DB and DB hybrid schemes were now “effectively trapped” under FMC with the legacy transition window (open prior to the December 1 regime start date last year) now closed.
He said three of four DB schemes shifted across to master trusts during the transition period in a move that required consent from all members.
Woodbury said the current technical difficulties of closing or shifting members of DB schemes could be eased with an “80/20” regulatory approach to rationalise the sector.
However, in a later session, James Hartley, Ministry of Business, Innovation and Employment head of financial markets policy, said such a waiver would likely require legislation – perhaps a hard sell in a post-election environment.
McGuinness et al highlighted a number of other technically complex issues facing workplace savings schemes including: related party transaction reporting; statement of investment policy and objectives (SIPO) limit breaks; tax classifications of DB schemes – which can be treated under insurance or super fund rules depending on whether funds have filed their annual EY11s (don’t ask); and, custodial audits.
Woodbury noted a quirk of the FMC rules meant super schemes were technically deemed as suppliers of custodial services even if underlying custody is outsourced.
However, ticking the custody box in the Financial Services Providers Register would see schemes hit by an extra annual $7,000 regulatory fee.
“That may be an intended or unintended consequence of the rules,” Woodbury said, with industry delegations lobbying the FMA for an exemption.