KiwiSaver periodic reporting requirements

Transcription

1 OFFICE OF THE MINISTER OF COMMERCE The Chair Cabinet Business Committee KiwiSaver periodic reporting requirements Proposal 1 This paper seeks approval to draft regulations to provide the requirements for the agreed mandatory disclosure of fees, returns and assets of retail KiwiSaver funds. Executive Summary 2 Currently there are no specific reporting requirements on KiwiSaver schemes to disclose information about the performance of their funds. Disclosure of such information is important for competitive markets because it increases transparency, enabling investors to compare different funds and make more informed and efficient investment decisions. Ensuring confidence and competition in retail KiwiSaver funds is important for national savings and economic growth. 3 In April 2010 Cabinet agreed that regulations should be prepared to require retail KiwiSaver schemes to make periodic reports about fund performance available to investors, the regulator and to the public. In November 2010 Cabinet agreed to the release of a discussion document for public consultation and invited the Minister of Commerce to report back on the details of the reporting requirements. Following feedback on the discussion document and on-going discussions with stakeholders, the Ministry of Economic Development developed a proposal for the content of the mandatory reports. 4 The proposed approach is consistent with developments in Australia, the European Union, Canada and the recently introduced Financial Markets Conduct Bill. 5 To minimise compliance costs and ensure the workability of the proposal I propose that funds will have to disclose the prescribed information in a standardised form. I propose that retail KiwiSaver funds be required to publish on their websites, and provide to the Financial Markets Authority (FMA): a. Four quarterly disclosure statements 10 business days after the end of each financial quarter; and b. An annual disclosure statement 90 standard days after the end of the tax year. 1 No: P/017/PR007/001

2 6 The periodic statements will contain the following information: a. Performance and returns a prescribed table disclosing the returns gross of fees and tax, the total net fees and tax; an example of a hypothetical investor demonstrating the impact of fees and taxes on the return; and, two graphs depicting the historical annual returns and fees; b. Fees and costs - a prescribed table setting out all the fees and costs incurred due to investing in the KiwiSaver fund and the portfolio turnover rate for the latest financial year; c. Assets and portfolio holdings a list of the underlying asset holdings; a pie graph depicting the composition of the KiwiSaver fund in terms of standard asset classes; and, a target asset allocation table indicating the fund s investment strategy; d. Liquidity and liabilities the liquidity ratio of the KiwiSaver fund representing the proportion of the fund s assets that are liquid; and the gearing ratio of the KiwiSaver fund representing how much the fund has leveraged; e. Key personnel and conflicts of interest the names, position, and tenure of the top 5 personnel who have the most impact on the fund s overall investment performance; any material changes to the fund s trade allocation and execution policies and the fund s proxy voting policies; and, any new related party transactions and the total percentage of related party transactions. 7 The FMA has agreed to provide any additional guidance and issue notices in respect of the proposed requirements. Any guidance will be developed alongside the regulations and will be issued at the same time as the regulations are promulgated. This will allow a reasonable implementation period for providers before the new regulations come into force on 1 April The Ministry has been engaging with stakeholders on the proposal. Stakeholders generally agree with the need and desirability of prescribed standardised reporting. Because there are many forms of retail KiwiSaver schemes the detail of the requirements is especially important. Hence, providers are keenly interested in seeing the detail of the proposal and how the proposal is translated into regulation. I propose stakeholders be consulted once the regulations have been drafted. Background 9 Disclosure by KiwiSaver funds is desirable for two reasons. The first is that the holder of a KiwiSaver account is the owner of the content of that account. As such, they have a right to information on the performance and contents of their investment. While this may not justify a high level of disclosure, it does imply that key information around asset holdings, returns, fees and basic information about how the fund is run should be disclosed. 10 The second ground for disclosure is that better information will enable investors to better compare investment products when making investment decisions and monitoring investment performance. This will not only facilitate better competition, and therefore improved net returns, in the KiwiSaver market, but may also increase the level of investment due to greater consumer confidence in the KiwiSaver industry. Both the increased net returns and possible additional investment would increase the pool of capital invested, and as such will contribute to the ongoing growth of New Zealand s economy. 2 No: P/017/PR007/001

3 11 There are currently 50 registered KiwiSaver schemes with approximately 1.89 million members. KiwiSaver schemes are each comprised of a number of KiwiSaver funds. Individual investors may invest in one or more funds within a scheme. The total amount invested in KiwiSaver schemes is approximately $9.186 billion. All KiwiSaver schemes are currently required to publish an investment statement and a prospectus which must be updated at regular intervals. 1 There are also on-going reporting requirements. These requirements are: a. Providing members with an annual personalised statement of contributions and accumulations; b. Providing members with a copy of the scheme-based annual report of the trustees; and c. Submitting an annual return to the regulator. The annual return enables the regulator to collect a standard set of statistical information. 12 These reports provide useful information to KiwiSaver members (about their individual accounts) and the regulator (about the schemes). However, there is no consistent information available to enable comparisons of different KiwiSaver funds. 13 As part of a global economy it is also important that New Zealand s markets are keeping up with international standards. New Zealand is one of the few OECD countries to not prescribe on-going disclosure requirements in relation to returns, fees and asset allocation of collective investment schemes. This may have an impact on investor confidence in our markets and on New Zealand s ability to participate in mutual recognition arrangements with other countries. Importance of disclosure 14 Disclosure is important because it: a. Increases transparency and informs investors of the fund s investment strategy, the potential risks and the actual returns and costs of investment. Investors can assess whether the fund s investment strategy is consistent with their investment philosophy and risk threshold; b. Enables the comparison of information across funds. Comparability is important because it enables investors to become more informed and make efficient investment decisions; and c. Increases the ability of investors to monitor the investment practices of the fund manager and ensure that the fund is adhering to its investment objective. Investors can also determine whether the fund manager s interests are aligned with their interests. 15 In April 2010 Cabinet agreed that regulations should be made requiring retail KiwiSaver schemes to make periodic reports about fund performance available to investors, the regulator and to the public [CAB Min (10) 14/6]. 1 The Financial Markets Conduct Bill, if passed as it is currently drafted, will replace the requirement to prepare a prospectus and investment statement with a product disclosure statement (PDS). 3 No: P/017/PR007/001

4 16 The intention of the regulations was not to encourage switching between funds, which would run contrary to the long term nature of KiwiSaver funds, but rather to ensure that when members are entering the market or switching funds, that the information they are able to access is accurate, complete and comparable. The policy recognised that a number of league tables and other similar comparisons already existed, but that due to incomplete and inconsistent reporting, the information in these tables was often not very accurate. 17 Retail KiwiSaver schemes are unrestricted schemes, meaning that they must extend their membership to anyone. Restricted schemes can only extend their membership to certain classes of persons, for example, employees, or people belonging to a particular industry, profession, association or society. Restricted schemes must be identified on the KiwiSaver schemes register. The proposed requirements will only apply to retail KiwiSaver schemes. 18 The proposed requirements will complement the new Financial Markets Conduct Bill regime that requires schemes to disclose the method of deducting fees and other relevant information in their trust deeds and their Product Disclosure Statement (PDS). The PDS is intended to provide potential investors with sufficient information about the type of scheme and the associated risks and benefits. The periodic reporting requirements will provide on-going information about the fund s performance. Public consultation 19 In November 2010 Cabinet agreed to the release of the discussion document, Periodic Reporting Regulations for Retail KiwiSaver Schemes, for public consultation and invited the Minister of Commerce to report back on the details of the reporting requirements [CAB Min (10) 42/6]. 20 The Ministry received 36 submissions, including submissions from fund managers, retail KiwiSaver providers, financial advisors, market commentators, lawyers, accountants, consumer bodies and industry bodies. In general, submitters supported the objectives behind the proposals; expressing a general recognition that enabling better investor decision-making would lead to better outcomes for all parties. 21 Submitters were concerned about the costs associated with disclosure. Submitters agreed that the reporting must give a true picture of the fund. However, this needs to be balanced with not overloading investors ability and willingness to take on information and so reporting only that which is most relevant. Submitters also stated that the reporting requirements should be consistent with international best practice. 22 The Ministry developed the reporting framework further and engaged in targeted consultation with stakeholders. Submitters generally agree on the proposed requirements and template. However, there are many forms of retail KiwiSaver schemes and therefore the detail of the requirements will impact differently on different schemes. Hence, schemes are interested in seeing the detail of the proposals and how the proposals are translated into regulation. 4 No: P/017/PR007/001

5 Comment Objective 23 The objective is to provide fund-specific information to investors, commentators, researchers and the regulator to facilitate informed investor choice and enable more comprehensive analysis and commentary to take place. To achieve this objective the proposals aim to provide information that is: a. Consistent and comparable; b. Transparent; c. Accessible and understandable; d. Targeted to the particular users; and e. Low cost. Outline 24 I propose that regulations be developed under s 70(1)(cb) of the Securities Act 1978 (the Act) requiring all retail KiwiSaver schemes to prepare (in accordance with the regulations and any guidance under s 54D) and publish (in accordance with s 54C): a. Four quarterly disclosure statements (QDS) at the end of each financial quarter according to the tax year ending 31 March; b. An annual disclosure statement (ADS) at the end of the tax year. 25 I propose that the QDS and ADS contain information regarding the fund s: a. Performance and returns; b. Fees and costs; c. Assets and portfolio holdings; d. Liquidity and liabilities; and e. Key personnel and conflicts of interest. 26 I propose that providers be required to both publish the statements on their websites and provide them to the regulator. Each QDS will need to be posted on the website ten business days after the end of the quarter. The ADS will need to be posted on the website 90 standard days after the end of the last quarter. Both statements will need to be sent to the regulator within the same timeframes. The statements will not need to be sent to members. 27 The fund manager 2 will be required to certify that to the extent of their knowledge all the required information has been disclosed, the information presented is accurate, and that nothing material has been omitted. 2 If a corporate entity manages the fund, the fund manager will be the relevant person within the corporate entity. 5 No: P/017/PR007/001

6 Presentation, terminology and guidance 28 I propose that standard templates for the QDS and ADS be set in regulations. This will ensure that all providers publish consistent information which is easy to compare. Further, it will help to minimise compliance costs for providers. Two draft templates are provided in Annex 1. The draft templates give an indication of what the final presentation may look like. However, officials will need to work with stakeholders and professionals on the final design. 29 I propose that the regulations require the information in the QDS and ADS to be calculated in accordance with the prescribed frameworks or methodologies. This will reduce the complexity of the statements and enable investors to properly understand and compare information across funds. The FMA has also agreed to issue, under s 54D, any supplementary guidance notices required in respect of the proposed requirements. Performance and returns 30 Disclosing the returns enables investors to compare the performance across different funds; shows the impact of fees and tax on returns; and enables comparisons between KiwiSaver funds and other investment types. The net return of the fund is the single most important factor because net returns ultimately determine the benefit for individuals from employing a manager to manage their investment. It is important that the focus is on the long term performance rather than on short term performance. Calculation methodology 31 I propose that provisions be put in place requiring retail KiwiSaver schemes to prepare the fund s returns using a prescribed set of standard calculation methodologies for calculating the fund s assets. This will ensure that all schemes are using the same methods ensuring consistency and enabling comparisons across funds. Disclosure of performance and returns 32 I propose that regulations be set requiring funds to disclose a standard set of information on returns in both the QDS and ADS. To aid investor understanding, I propose that an example be provided based on a hypothetical investor who invests $10,000 at the beginning of the relevant period; 3 with a prescribed investor rate (PIR) of 28%; and who does not make any contributions or investor specific decisions. This will enable comparisons across different funds regardless of the composition of their members or the size of the investments. I propose that a table, such as the one below be used: Return Based on: Total invested $10,000 PIR 28% Return gross of fees and tax: $500 Tax (28% PIR) $150 Fees Fund fees (excluding fees charged for investor specific decisions) $50 Scheme-level fees (monthly member fees) $5 XX% (for the past year) 3 For the ADS the start of the relevant period will be the start of the financial year. For the QDS this will be the start of the rolling annual year i.e. four quarters earlier. 6 No: P/017/PR007/001

7 33 The table will be supported by a written description to assist investor understanding. The hypothetical example demonstrates to investors the impact of fees and tax on returns. The highest tax rate should be used to show the largest amount of tax that may be deducted. All funds will need to disclose all the taxes as if the member has a PIR of 28%. 34 I propose that schemes be required to publish the fund s total return before fees and tax, along with the total figures charged for fees and tax. A standardised table, such as the table below, should be used to present return information: Based on Net Asset Value of: $0000 Return gross of fees and tax Total fees and costs charged to the fund Total tax (this is paid by investors in the fund) % of NAV % of NAV % of NAV 35 In the ADS these figures will be the total returns and fees and costs for the latest financial year. The QDS will disclose the returns on a rolling annual basis. 4 The rolling annual return provides up to date information and the focus remains on the long term rather than the short term, or quarterly, gains. However, the total fees and costs will be taken from the latest financial year. 5 Past returns 36 Reporting past returns is important so investors and commentators can see the long term trends of the fund. I propose that funds should be required to disclose historic annual performance in the QDS. Funds should disclose the performance over each year for the last ten years and since the inception of the fund. The return figure should be the annual rate of return net of all fees and gross of tax. 37 To assist investors the historic annual total returns should be disclosed as a graph, which clearly shows returns as a percentage of the NAV. Another graph should depict the total fees and costs as a percentage of the NAV (see example template provided in Annex 1). Although past returns do not indicate future returns, disclosure of historic returns will show the volatility of a fund over time and is therefore a way of presenting the risk to the investor. 4 A rolling annual return means the return for the last four quarters. This differs from an annualised return which is the return for the relevant quarter multiplied by four. 5 Requiring providers to calculate their fees and costs once a year will reduce compliance costs compared to calculating the fees and costs every quarter. In addition, some fees and costs are only incurred periodically (for example audit costs), and hence quarterly disclosure is not particularly useful for investors, as the costs in one quarter could not easily be used to estimate the annual costs. 7 No: P/017/PR007/001

8 Fees and costs 38 Disclosing the fees and costs enables investors to understand where the fees and costs are being incurred and to make comparisons across different funds. To enable this comparison, I propose that all fees and costs be required to be disclosed. This will be done through the use of a standard template for the presentation of the fees and costs. In addition a set of prescribed terminology for use in the template will be set in regulations. Funds will be required to disclose a complete breakdown of fees in the ADS and a summary of the categories in the QDS. The QDS fees will be based on the ADS figures. The fees and costs will be divided into the following categories: a. Total costs deducted from the fund: i. Costs of investing in the fund; b. Scheme level fees: i. Monthly member fee (if applicable); c. Fees deducted from specific investors: i. Financial adviser fees; and ii. Fees for servicing investor specific decisions. 39 Differentiating between the fees and costs charged at the fund and scheme level ensures that every fee and cost is included and enables investors to understand where those fees and costs are incurred. For the same reasons it is important to differentiate between the costs of investing in the fund and the fees incurred by individual investors decisions. A further breakdown and a description of the fee categories are set out in Annex 1. Total expense ratio 40 I propose that providers be required to disclose the total expense ratio (TER) of the fund. The TER is an internationally recognised method for calculating and presenting fees. It is a measure of the additional cost that an investor incurs by using the manager instead of directly investing themselves. 41 Although investors may have difficulty understanding the TER, it will enable commentators and researchers to compare the administrative and operational costs of different funds. It will also enable comparisons of New Zealand and international funds. These comparisons will assist investors over the long term as such comparisons will indicate which funds have higher administrative and operational costs. 42 The TER will be based on the IOSCO standard TER and include all the fees and costs in the costs of investing in the fund category. For more information see Annex 1. 8 No: P/017/PR007/001

9 Transaction costs 43 Transaction costs are the costs generated when a fund manager buys or sells securities within the fund s portfolio. Disclosure of all transaction costs would be ideal. However, given funds often (and should) invest in large offshore funds; it is not possible to calculate transaction costs at all levels within the investment chain. This is because international standards do not require disclosure of transaction costs; therefore New Zealand funds will not always be able to obtain the relevant information from offshore wholesale funds. 6 Therefore, I propose that providers be required to disclose the portfolio turnover rate, 7 which gives an indication of the transaction costs because the greater the turnover rate the more costs the fund incurs. The impact of the transaction costs will still show up on the fund s gross returns as they affect the value of the assets. Asset allocation and portfolio holdings 44 Disclosure of portfolio holdings increases the ability of investors to monitor the investment practices of the fund manager to assess whether they are consistent with the fund s investment philosophy and to assess the investor s level of exposure to risk. Disclosure of the composition of the fund is also important as it shows investors where the investments are concentrated and where the potential risks lie. 45 I propose that, in the ADS, funds be required to disclose the list of underlying asset holdings including the asset holdings of any wholesale funds invested in. This will prevent funds from using wholesale funds to avoid disclosure and will provide useful information to commentators and regulators. In the ADS and QDS funds should be required to disclose the top 10 asset holdings. To avoid requiring funds to disclose lists that are costly to prepare and information that may already be publicly available, schemes will be required to disclose: a. All securities and other assets directly held by the KiwiSaver fund; and b. The underlying securities of other managed investment funds in which the KiwiSaver fund has invested. Where the other managed investment fund comprises of under 5% of the KiwiSaver fund s assets, or the assets of the other managed investment fund are available to the public, the KiwiSaver fund should only be required to disclose the name of that managed investment fund. 46 To further relieve funds of the burden of disclosure, the FMA also has a general power to grant exemptions under the Act. Such exemptions may be granted where the information about the underlying assets is not available or the cost of acquiring the information and performing the calculations exceeds the benefits to investors from disclosing that information. 47 Information about the asset holding should include: a. The name, geographic location, class of asset (based on standard classifications discussed below) and credit rating (if applicable); and b. The value of the asset as a percentage of the NAV. 6 Wholesale funds are funds that do not directly market to retail consumers in New Zealand. 7 The portfolio turnover rate is a measure of how often assets are bought and sold, usually calculated over one financial year. For example, if a fund sells all of its assets within that year, it will have a portfolio turnover rate of 100%. 9 No: P/017/PR007/001

10 Classification of portfolio holdings 48 I propose that funds disclose the composition of the fund using prescribed asset classes, in a manner consistent with the prescribed methodology, in the ADS and QDS. Funds should also disclose the proportion of the fund invested in each class of asset. This will enable investors and commentators to see the concentration of the investments and thus the total levels of exposure. For simplicity this information should be presented in a pie graph. Many providers already disclose the composition of their funds in this way. 49 I propose that funds also be required to present the pie graph alongside a table that sets out the fund s target asset allocation. The target asset allocation will contain the same categories and will give investors an idea of the fund s investment strategy and aims. This will also indicate where the funds are positioned relative to their target asset allocation (see example in Annex 1). Liquidity and liabilities 50 Disclosing the liquidity ratio and debt level will provide an overview of the fund s financial situation by showing the fund s level of risk. Disclosure will also enable investors to use this information to assess the suitability of the fund s strategy against their own investment goals. Disclosure will also increase transparency and remind investors of the risks inherent in investing. I propose that funds should be required to disclose information about the fund s liquidity and liabilities. The methodology for calculating and presenting the information will be prescribed. In particular, funds will be required to disclose: a. The liquidity ratio: this represents the proportion of the fund s assets that are liquid. The liquidity ratio will have an impact on the ability of investors to transfer or withdraw funds in the event of unforeseen circumstances; b. Liabilities disclosure (gearing ratio): this represents how much the fund has borrowed compared to the fund s assets. Leverage alters the risk profile of the fund because it amplifies both the potential returns and losses of the fund. 51 It is not expected that all investors will be interested in this information. However, disclosure will enable advisers, commentators and regulators to assess the fund s strategy and alert investors to funds with high leverage ratios and the risks associated with them. Key personnel and conflicts of interest 52 Funds are responsible for investing other people s money and therefore it is important that the investment decisions of the fund are transparent and consistent with investor interests. The fund s performance is dependent on the people making the investment decisions regarding the fund. The experience and history of managers may therefore influence investors decision making, particularly in the case of funds that market themselves based on their personnel. Disclosing conflicts of interest is important because it enables market participants to monitor the fund manager s investment decisions to determine whether these are consistent with the investors interests. 10 No: P/017/PR007/001

11 53 I propose that funds should disclose information relating to the fund s key personnel in both the QDS and the ADS. In the ADS, disclosure should be extended to up to the 5 personnel who have the most impact on the fund s overall investment performance. In the QDS only one person should be disclosed. The top personnel are likely to include persons such as the chief investment officer, the chief financial officer and the senior investment analyst. Disclosure should include: a. Name; b. Position; c. Tenure in that position; d. Previous position; and e. Tenure in previous position. 54 Disclosure of key personnel provides useful information to commentators who are able to trace the history and performance of fund managers and interpret such information on behalf of investors. 55 I propose that funds should also disclose the following: a. A summary of the material changes to the fund s trade allocation and execution policies (in the ADS) and a website link to any material changes within the relevant quarter (in the QDS); b. A summary of the material changes to the fund s proxy voting policies (in the ADS) and a website link to any material changes within the relevant quarter (in the QDS); and c. The total percentage of related party transactions and the names of the related parties (in the ADS) and a website link to any new related party transactions within the relevant quarter (in the QDS). 56 Disclosure of such information is important because it enable investors and regulators to determine where the fund managers interests lie. This will improve transparency and encourage fund managers to align their interests with the interests of investors. Compliance costs 57 Most KiwiSaver providers already have the systems in place to collect information about the fund s returns, fees and assets. All providers are required to report on such information in their annual report, which is audited, and their annual return to the FMA. Therefore, it is not anticipated that providers will incur significant additional costs associated with obtaining the required information. The requirements imposed by these regulations will primarily relate to how this base information is presented and distributed, and the internal processes employed to publically disclose this information. 58 Providers are likely to have start-up costs associated with implementing the new data systems, depending on the final details of the proposed presentation and methodologies. Because providers have different fund structures and different methodologies for calculating and presenting information, the costs imposed on them by the proposals will differ between providers, depending whether their current methodologies are similar to the proposals. However, based on information from two large providers, it is estimated that the start-up costs for each provider may be ranging from $25,000 to $100, No: P/017/PR007/001

12 59 Many KiwiSaver providers also already make such information available to the public and provide information to commentators and researchers. The key on-going cost for providers will be associated with their internal quality assurance processes to ensure the QDS and ADS are accurate and published on time. While these documents will not be audited externally, full accountability for misstatements will attach to them, and so companies will have to have sufficiently robust internal mechanisms to ensure accuracy. Consultation 60 In preparing the proposals, the Ministry consulted industry, including retail KiwiSaver providers, Workplace Savings, the Investment Savings and Insurance Association, the New Zealand Bankers Association and Morningstar. 61 The Ministry also consulted the following government agencies: the FMA, the Inland Revenue Department and the Treasury. In addition, OEGI was consulted on this paper. The Department of Prime Minister and Cabinet was also informed. 62 During the drafting and finalising of the regulations further consultation will be undertaken on technical aspects of the drafting. Fiscal Implications 63 The FMA will incur costs associated with the preparation of guidelines, which will be absorbed in its current appropriations. There will also be costs associated with granting exemptions to KiwiSaver providers. Exemption costs will be calculated according to the Financial Markets Authority s standard fees and levies that will be imposed directly on market participants requesting exemptions. It is not anticipated that many, if any, exemptions will be required. Human Rights 64 There are no human rights issues associated with this paper. Legislative Implications 65 If Cabinet approves of the proposals in this paper there will need to be regulations made under s 70(1)(cb) and s 54C of the Securities Act Regulatory Impact Analysis 66 The RIA requirements apply to the proposals in this paper and a RIS has been prepared and attached to the Cabinet paper. Quality of the Impact Analysis 67 The Deputy Secretary, Organisational Development and Support Branch, Ministry of Economic Development and the Regulatory Impact Analysis Review Panel have reviewed the Regulatory Impact Statement (RIS) prepared by the Ministry of Economic Development and associated supporting material, and considers that the information and analysis summarised in the RIS meets the criteria necessary for Ministers to fairly compare the available policy options and take informed decisions on the proposals in this paper. 12 No: P/017/PR007/001

13 Consistency with Government Statement on Regulation 68 I have considered the analysis and advice of my officials, as summarised in the attached Regulatory Impact Statement and I am satisfied that, aside from the risks, uncertainties and caveats already noted in this Cabinet paper, the regulatory proposals recommended in this paper: Are required in the public interest; Will deliver the highest net benefits of the practical options available; and Are consistent with our commitments in the Government Statement on Regulation. Publicity 69 If Cabinet approves the proposals in this paper, the Ministry will post the paper on its website and the Minister of Commerce will release a press statement on the proposals. 70 If Cabinet agrees to the proposals the intention is that Parliamentary Council Office will draft the regulations. The Ministry will engage in further consultation with stakeholders on the draft regulations. It is intended that the regulations will be in place by 1 September 2012 to ensure that KiwiSaver providers have time to implement the relevant systems before the regulations take effect from the beginning of the 2013 tax year, i.e. 1 April No: P/017/PR007/001

14 Recommendations It is recommended that the Committee: 1 Note that in April 2010 Cabinet agreed that regulations should be made requiring retail KiwiSaver schemes to make quarterly reports about fund performance available to investors, the regulator and the public [CAB Min (10) 14/6]; 2 Note that in November 2010 Cabinet agreed to the release of a discussion document on options for periodic reporting by retail KiwiSaver schemes for public consultation and invited the Minister of Commerce to report back on the details of the reporting requirements [CAB Min (10) 42/6]; 3 Agree that regulations be developed under s 70(1)(cb) and s 54C of the Securities Act 1978 requiring all retail KiwiSaver funds to prepare and publish on their websites: 3.1 Four quarterly disclosure statements ten business days after the end of each financial quarter according to the tax year; and 3.2 An annual disclosure statement 90 standard days after the end of the tax year; 4 Agree that the regulations require the information in the periodic statements to be calculated in accordance with the frameworks and methodologies specified in a notice issued by the Financial Markets Authority under s 54D; 5 Note that it is intended that the periodic statements will be posted on the offers register under the Financial Markets Conduct Bill if the Bill is enacted; 6 Agree that the fund manager will be required to certify that to the extent of their knowledge, all the required information has been disclosed, the information presented is accurate, and that nothing material has been omitted; 7 Agree that the periodic statements be required to contain the following information: Performance and returns 7.1 In the annual and quarterly disclosure statements, a written example of the returns for a hypothetical investor, who invests $10,000 with a prescribed investor rate (PIR) of 28%, based on the KiwiSaver fund s returns, alongside a prescribed table, such as the table below: Return Based on: Total invested $10,000 PIR 28% Return gross of fees and tax: $500 Tax (28% PIR) $150 Fees Fund fees^ $50 Scheme-level fees (monthly member fees) $5 ^ Fees exclude fees charged for investor specific decisions. XX% (for the past year) 14 No: P/017/PR007/001

15 7.2 In the annual and quarterly disclosure statements, a prescribed table such as the table below, containing the KiwiSaver fund s returns, gross of fees and tax, as a percentage of the Net Asset Value, compared to the total fees and tax: Description Return gross of fees and tax Total fees and costs charged to the fund Total tax (this is paid by investors in the fund) % of Net Asset Value 7.3 In the annual and quarterly disclosure statements, a graph containing the historical annual returns as a percentage of the Net Asset Value, net of fees and gross of tax, for each year since the inception of the KiwiSaver fund (up to ten years) and the average since the inception of the fund; 7.4 In the annual and quarterly disclosure statements, a graph containing the historical annual fees and costs as a percentage of the Net Asset Value for each year since the inception of the KiwiSaver fund (up to ten years) and the average since the inception of the fund; Fees and costs 7.5 In the annual and quarterly disclosure statements, a portfolio turnover rate for the latest financial year; 7.6 In the annual disclosure statement, a prescribed table, such as the table below, which sets out all the fees and costs that an investor will potentially incur when investing in the KiwiSaver fund: Scheme level and fund level fees and costs Costs deducted from the fund Costs of investing in the fund Annual investment management fee (including financial adviser fees charged to the fund) Value as % of NAV Value as % of NAV Fees of underlying managers Value as % of NAV Performance fees Value as % of NAV Consultant fees (if incurred in addition to investment management fee) Value as % of NAV Investment research costs Value as % of NAV Administration and operating expenses including: Value as % of NAV Accounting an corporate overhead fees Value as % of NAV o Trustee fees Value as % of NAV o Audit fees Value as % of NAV o Custodial fees Value as % of NAV o Registry fees Value as % of NAV o Legal and compliance fees Value as % of NAV o Marketing fees (including printing and posting) Value as % of NAV o Tax incurred by the fund Value as % of NAV o Other Value as % of NAV Total Expense Ratio (based on IOSCO standard) Value as % 15 No: P/017/PR007/001

16 Scheme level fees Total monthly member fee charges deducted from fund (if separate) Other fees and costs Fees deducted from specific investors $ per member and total $ Financial adviser fees (deducted from specific investors) Value as $ Fees for servicing investor specific decisions Value as $ Establishment fee Value as $ Contribution fee Value as $ Withdrawal fee Value as $ Transfer fee Value as $ Switching fee Value as $ Special request fees Value as $ 7.7 In the quarterly disclosure statement, a prescribed table, such as the table below, which summarises the fees and costs that an investor will potentially incur when investing in the KiwiSaver fund: Apart from the cost of investing in the fund ($50) and the scheme level fees ($5), investors may also incur the following costs: Other fees and costs Financial adviser fees (deducted from specific investors) Value as $ Fees for servicing investor specific decisions Establishment fee Value as $ Contribution fee Value as $ Withdrawal fee Value as $ Transfer fee Value as $ Switching fee Value as $ Special request fees Value as $ Assets and portfolio holdings; 7.8 In the annual disclosure statement, a list of underlying asset holdings including: All securities and other assets directly held by the KiwiSaver fund; and The underlying securities of other managed investment funds that the fund has invested in. Where the other managed investment fund comprises of under 5% of the fund s assets, or the assets of the other managed investment fund are available to the public, the fund should only be required to disclose the name of that managed investment fund; 7.9 In the annual and quarterly disclosure statements, a list of the fund s top 10 asset holdings; 16 No: P/017/PR007/001

17 7.10 In the annual and quarterly disclosure statements, information about the asset holding including: The name, geographic location, class of asset and credit rating (if applicable); and; The value of the asset as a percentage of the Net Asset Value; 7.11 In the annual and quarterly disclosure statements, a pie graph depicting the composition of the KiwiSaver fund in terms of prescribed standard asset classes ; 7.12 In the annual and quarterly disclosure statements, a table representing the KiwiSaver fund s target asset allocation; Liquidity and liabilities 7.13 In the annual and quarterly disclosure statements, the liquidity ratio of the KiwiSaver fund representing the proportion of the fund s assets that are liquid; 7.14 In the annual and quarterly disclosure statements, the gearing ratio of the KiwiSaver fund representing how much the fund is leveraged; Key personnel and conflicts of interest 7.15 In the annual disclosure statement, the names, position, previous position and tenure in those positions of up to five personnel who have the most impact on the fund s overall investment performance; 7.16 In the quarterly disclosure statement, the name, position, previous position and tenure in those positions of the top person who has the most impact on the fund s overall investment performance; 7.17 In the annual disclosure statement, a summary of material changes to the fund s trade allocation and execution policies and in the quarterly disclosure statement, a website link to any material changes within the relevant quarter; 7.18 In the annual disclosure statement, a summary of material changes to the fund s proxy voting policies and in the quarterly disclosure statement, a website link to any material changes within the relevant quarter; 7.19 In the annual disclosure statement, the total percentage of related party lending and the names of the related parties and in the quarterly disclosure statement, reference to any new related party transactions within the relevant quarter; 8 Note that the Financial Markets Authority has the authority to grant exemptions to the reporting requirements; 9 Note that the Financial Markets Authority has agreed to issue any additional guidance required in respect of the reporting requirements; 10 Invite the Minister of Commerce to instruct the Parliamentary Counsel Office to draft the proposed regulations; 11 Authorise the Ministry of Economic Development to consult on the draft regulations; 12 Authorise the Minister of Commerce to agree to any minor or technical policy changes and other changes which are consistent with Government policy on behalf of Cabinet; 17 No: P/017/PR007/001

18 13 Note that the intention is that the regulations will be in force by 1 September 2012 to ensure that KiwiSaver providers have time to implement the relevant systems and processes before the regulations take effect from the beginning of the 1 April March 2013 tax year; and 14 Agree to the Ministry of Economic Development publishing this paper on their website and the Minister of Commerce releasing a press statement about the proposals. Hon Craig Foss Minister of Commerce / / 18 No: P/017/PR007/001

19 Annex 1: Draft Disclosure Statement Templates Quarterly disclosure statement (1 July 31 October 2011) KiwiSaver Retail Fund A Fund launched: July 2008 Fund type: conservative Net asset value (NAV): $0000 Number of members in the fund: Return for hypothetical investor investing $10,000 at 1 November 2010: Return XX% (for the past year) Based on a return of XX%, if Amy invests Based on: $10,000 into Fund A on 1 November 2010, and does not make any further contributions or Total invested $10,000 withdrawals, at 31 October 2011 Amy will have a PIR 28% gross return of $500. Return gross of fees and tax: $500 Tax (28% PIR) $150 Fees Fund fees^ $50 Scheme-level fees (monthly member fees) $5 Other fees and costs as at 31 October 2011 If Amy has a prescribed investor tax rate (PIR) of 28%, $150 will be deducted from her return. Amy will also be charged $55 in fees. Amy s total return after fees and tax are deducted will be $295. Apart from the cost of investing in the fund ($50) and the scheme level fees ($5), investors may also incur the following costs: Other fees and costs Financial adviser fees (deducted from specific investors) Value as $ Fees for servicing investor specific decisions Establishment fee Value as $ Contribution fee Value as $ Withdrawal fee Value as $ Transfer fee Value as $ Switching fee Value as $ Special request fees Value as $ Return of whole fund between 1 November 2010 and 31 October 2011 Based on Net Asset Value of: $0000 Return gross of fees and tax - Total fees and costs charged to the fund, including general fees and fees for investor specific decisions^. % of NAV % of NAV - Total tax (this is paid by investors in the fund) % of NAV ^ These figures are based on the last Annual Disclosure Statement for the period 1 April March

20 Comparison of annual performance since date of inception* * These graphs represent the actual returns (net of fees and gross of tax) and the fees as a percentage of the Net Asset Value. Portfolio holdings of the fund at 31 October 2011 Top 10 investments Holding % of NAV Class Geographic location Credit rating Total Liquidity ratio: Gearing ratio: Portfolio turnover: Investment mix Target asset allocation Cash Range or % Unlisted property Range or % International fixed Range or % interest Australasian fixed Range or % interest International equities Range or % Australasian equities Range or % 20

21 Significant changes Trade allocation and execution policies: Further information can be found on online at.. Related party lending: (details of any transactions incurred in this quarter that didn t exist in the previous quarter). Further information can be found on online at.. Key personnel Name: Position: Length of tenure in that position: Previous position: 21

22 Annual disclosure statement (1 April March 2011) KiwiSaver Retail Fund A Fund launched: July 2008 Fund type: conservative Net asset value (NAV): $0000 Number of members in fund: Return for hypothetical investor investing $10,000 at 31 March 2011: Return XX% (for the past year) Based on a return of XX%, if Amy invests $10,000 into Fund A on 1 April 2010, and does Based on: not make any further contributions or Total invested PIR $10,000 28% withdrawals, at 31 March 2011 Amy will have a gross return of $500. Return gross of fees and tax: $500 Tax (28% PIR) $150 Fees Fund fees^ $50 Scheme-level fees $5 (monthly member fees) ^ Fees exclude fees charged for investor specific decisions which are set out below. If Amy has a prescribed investor tax rate (PIR) of 28%, $150 will be deducted from her return. Amy will also be charged $55 in fees. Amy s total return after fees and tax are deducted will be $295. Return of whole fund for the period 1 April March 2011 Based on Net Asset Value of: $0000 Return gross of fees and tax - Total fees and costs charged to the fund, including general fees and fees for investor specific decisions. % of NAV % of NAV - Total tax (this is paid by investors in the fund) % of NAV Comparison of annual performance since date of inception* * These graphs represent the actual returns (net of fees and gross of tax) and the fees as a percentage of the Net Asset Value. 22

23 Fees and costs for 1 April March 2011 Scheme level and fund level fees and costs Costs deducted from the fund Costs of investing in the fund Annual investment management fee (including financial adviser fees charged to the fund) Value as % of NAV Value as % of NAV Fees of underlying managers Value as % of NAV Performance fees Value as % of NAV Consultant fees (if incurred in addition to investment management fee) Value as % of NAV Investment research costs Value as % of NAV Administration and operating expenses including: Value as % of NAV o Accounting an corporate overhead fees Value as % of NAV o Trustee fees Value as % of NAV o Audit fees Value as % of NAV o Custodial fees Value as % of NAV o Registry fees Value as % of NAV o Legal and compliance fees Value as % of NAV o Marketing fees (including printing and posting) Value as % of NAV o Tax incurred by the fund Value as % of NAV o Other Value as % of NAV Total Expense Ratio (based on IOSCO standard) Value as % Scheme level fees Total monthly member fee charges deducted from fund (if separate) Other fees and costs Fees deducted from specific investors $ per member and total $ Financial adviser fees (deducted from specific investors) Value as $ Fees for servicing investor specific decisions Value as $ Establishment fee Value as $ Contribution fee Value as $ Withdrawal fee Value as $ Transfer fee Value as $ Switching fee Value as $ Special request fees Value as $ 23

24 Portfolio holdings of the fund at 31 March 2011 Top 10 investments Holding % of NAV Class Geographic location Credit rating Total Liquidity ratio: Liabilities disclosure: Portfolio turnover: Investment mix Target asset allocation Cash Range or % Unlisted property Range or % International fixed Range or % interest Australasian fixed Range or % intrest International equities Range or % Australasian equities Range or % Other Range or % 24

25 Key personnel Name: Position: Length of tenure in that position: Previous position: Name: Position: Length of tenure in that position: Previous position: Name: Position: Length of tenure in that position: Previous position: Name: Position: Length of tenure in that position: Previous position: Name: Position: Length of tenure in that position: Previous position: Portfolio holdings of fund at 31 March 2011 Full list of holdings can be found on online at.. Other Changes to the trade execution policies Changes to the proxy voting policies: Related party transactions: Name A B Total exposure: %00 of net assets 25