Mar 26, 2025
In December 2024 the Ministry of Business, Innovation and Employment (MBIE) issued a discussion document entitled Enabling KiwiSaver investment in private assets (Document). The Document was published under the imprimatur of the then Minister of Commerce and Consumer Affairs, Andrew Bayley, who subsequently resigned on 24 February 2025. The government has notably been a strong advocate for KiwiSaver schemes investing more in New Zealand-domiciled unlisted private assets such as road and rail projects, renewable energy projects, and private businesses. The Corporate Trustees Association (CTA), of which Trustees Executors is a member, entered into discussions with MBIE about KiwiSaver schemes investing into New Zealand-domiciled private assets and put in a submission that was supportive of a number of proposals as set out in the Document. Submissions closed on 14 February 2025. MBIE’s recommendations arising from the Document’s discussion to the new Minister, Scott Simpson, have yet to be published.
Whilst it is now too late for submissions on the Document to be made, there still remain some matters it raises that bear further examination due to their currency. On the face of it, the Document is concerned with beneficially expanding the investable universe of KiwiSaver schemes. Yet studied more closely, it appears that the Document’s real objective is New Zealand’s economic development, in relation to which opening up KiwiSaver schemes as sources of additional development capital is instrumental. Throughout the document, getting KiwiSaver schemes to help grow the New Zealand economy by buying more private assets is the principle underlying theme. In this regard, KiwiSaver schemes are a means to the end of improving New Zealand’s economy.
It is clear in the Document that the proportion of private assets held in KiwiSaver schemes is regarded as woefully deficient when compared with comparable retirement savings vehicles in overseas jurisdictions:
New Zealand’s investment of retirement funds into private assets is particularly low compared to pension funds in other jurisdictions. As at 31 March 2024, 72.4 per cent of KiwiSaver money was invested in stock in overseas businesses and fixed interest compared to around 2-3 per cent allocated to private assets. By comparison as at 30 June 2024, Australia had $3.6 trillion (AUD) in superannuation assets, with almost 16 per cent invested in private assets.
[Ibid., p. 5]
To rectify this perceived inadequacy, the Document provides objectives that demonstrate its economic growth bias:
The primary objectives of this work are to enable greater KiwiSaver investment in private assets to:
a. support the long-term financial wellbeing of KiwiSaver members
b. support the long-term productivity and growth of New Zealand businesses
c. support the funding and development of private assets such as infrastructure
This work may also contribute to broader Government goals by providing funding to support climate measures such as emissions reductions and adaptation initiatives.
[Document, pp. 6-7]
Four objectives, then, including one linked to climate change, but only one of them is concerned with KiwiSaver. Reaching these objectives is said to be hindered by a problem – the apparent dearth of KiwiSaver capital reaching private assets – that the Document sets out in a pair of sentences:
Our view is that the current regulatory settings for KiwiSaver do not support investment in private assets by KiwiSaver providers. … this means KiwiSaver members may be missing out on a better diversification of risk and better returns, and New Zealand businesses and the economy may be missing out on a significant source of funding.
[Ibid., p. 7]
So far as benefits to KiwiSaver members from more investment by Kiwisaver schemes in private assets are concerned, they appear to be rather uncertain, to judge by the Document’s description of them:
There could be substantial benefits for KiwiSaver members from investment in private assets. Potential benefits include exposure to a broader range of investments, which diversifies risk. Greater diversity of investments may also bring higher returns for KiwiSaver members in the long run.
[Ibid., p. 5]
Diversification is regarded as a good way to reduce risk in a portfolio, but does not of itself generate superior returns. The quality of assets selected for a portfolio determines returns to investors. A portfolio diversified across poor quality assets is not going to enhance returns through its diversification. Whether private assets are also high quality assets would determine their merits for inclusion within a portfolio in order to help increase investor returns.
This question is not addressed by the Document, which simply assumes that private assets must be good things to have, most especially in KiwiSaver schemes. The Document clearly envisages investments in private assets as being direct investments, in that Kiwisaver schemes would buy direct equity in private assets that would typically be illiquid for lack of a secondary market. However, in principle, New Zealand’s road and rail projects, renewable energy projects, and private businesses could all be listed on the NZX, either as company shares or via debt issuance. That they are not points to longstanding unresolved issues with corporates being listed on the NZX versus remaining private.
Some private assets may prefer to stay that way for reasons of scale, closely held ownership resistant to dilution of control and equity, existing adequate capital sources, or not wanting to operate under the harsh spotlights of the continuous disclosure regime, shareholder or bondholder meetings, and media scrutiny, for example. They may need some coaxing to take on the step of listing. Globally, the number of new listings is decreasing. Nonetheless it could worth examining why New Zealand-domiciled private assets are not finding ways to list on the NZX.
The Document does not make out a case for lack of capital being available for investing in New Zealand-domiciled private assets. It is simply assumed that KiwiSaver schemes have capital that private assets should be able to access more of. At least some private assets may not need more capital or else already have access to additional capital as required on attractive terms. The cost of capital would be a significant consideration for private assets, particularly those with long-term development or repayment horizons. Equity is standardly regarded as the most expensive form of capital funding.
Private assets may also find that traditional sources of funding such as bank loans are not available to them because they are too risky, or too slow to fruition to make an acceptable payoff for investors or creditors. Because KiwiSaver is supposed to foster long-term retirement savings it could be seen as just the ticket to close a perceived capital investment gap for private assets that need long-term funding.
Merely because an asset is private does not of itself make it a good investment. It may not be desirable to channel KiwiSaver scheme capital into private assets that mainstream capital providers are loath to touch. Like KiwiSaver, the New Zealand Superannuation Fund (NZSF) has been touted as a potential honeypot investor in the national interest, which in effect means being an investor of last resort when private sector alternatives are not stumping up their money and the government does not want to commit any of its own. It is implied in the Document that KiwiSaver should be investing in the national interest, yet the case for KiwiSaver doing so can hardly be much different than that for the NZSF.
The Document touches upon a theme that it does not develop in that it claims that Australian superannuation funds have around 16% (i.e., AUD57.6 billion) of their AUD3.6 trillion assets under management invested in private assets as at 30 June 2024. It is implied that this is an aspirational target for New Zealand to emulate. An average Australian superannuation scheme portfolio would look like the following:
According to the KiwiSaver Annual Report 2024, as at 31 March 2024, KiwiSaver schemes had a total of $111.8 billion in funds under management (FUM). Taking the upper bound 3% quoted by the Document as the proportion of KiwiSaver FUM invested in New Zealand-domiciled private assets, that implies $3.6 billion, apparently is not enough. Scaling up to Australian levels implies that KiwiSaver schemes should have $17.9 billion invested in New Zealand-domiciled private assets and then we might be hitting the spot. At present, an average KiwiSaver scheme portfolio would look like the following:
Of course, the average scheme portfolio will not be representative of actual scheme portfolios, which may individually have higher or lower allocations to private assets.
The Document does not consider what factors come into play in Australia that have led to a much higher rate of Australian superannuation fund investment into private assets than has occurred to date in New Zealand. It is simply assumed that Australian superannuation funds are permitted to facilitate greater investment in private assets than the present technical rules for KiwiSaver schemes allow for. However, there may be other factors over in Australia that encourage greater superannuation fund investment in private assets than apply in New Zealand, such as the permissibility of self-managed super funds (SMSFs), which tend to be biased towards buying private and illiquid assets, particularly real estate. Additionally, the Australian economy is vastly bigger than the New Zealand economy, which implies many more types and opportunities on offer to choose from among private assets over the ditch.
Retirement saving is compulsory in Australia whereas it is voluntary in New Zealand. KiwiSaver schemes must offer members more options to withdraw their funds in part or whole other than just passively reaching retirement age, including KiwiSaver scheme transfers under rules that govern the permitted time period of transfer to another scheme and prohibit membership of more than one KiwiSaver scheme at a time. Accordingly, there is an element of unpredictability about how long any given member might remain in a KiwiSaver scheme. This unpredictability could have bearing upon asset allocation decisions made by KiwiSaver scheme managers.
There would be limits applicable to what KiwiSaver schemes could safely invest into private assets, such as fund manager prudent conduct in asset allocation (an FMC Act section 144 requirement), effective liquidity risk management, maintenance of PIE taxation status, and asset quality criteria, the latter including increasing onus on responsible investing.
Apart from what the Document does not take into consideration, but which nonetheless can be relevant to any comprehensive discussion around how KiwiSaver schemes could invest more into New Zealand-domiciled private assets, there are peculiarities in the way in which some matters considered are addressed. In terms of KiwiSaver members, the Document is focused on how these people can get more of their retirement savings directed into New Zealand-domiciled private assets, without examining whether non-KiwiSaver retail funds that specialise in private assets might be a suitable alternative for optional additional retirement savings.
KiwiSaver members are viewed through the monocular lens of their scheme withdrawal rights, and how these rights can be accommodated when their scheme has illiquid private assets. Not considered in the Document are the rights of KiwiSaver members who choose to remain fully invested in their scheme rather than withdraw their funds in part or whole. Kiwisaver scheme managers are obliged to meet their obligations under FMC Act section 143, in particular to act in the best interests of their scheme participants and treat those participants equitably. How these statutory requirements can be met by increasing the proportion of illiquid private assets held in KiwiSaver schemes is simply not considered. Instead there is just passing mention of these requirements made in section 24 of the Document wherein FMA’s Liquidity risk management guide of April 2024 (Guide) is summarised in a paragraph.
Liquidity risk management (LRM) comes into the picture in the Document’s Proposal 1: Enabling KiwiSaver providers to use liquidity risk management tools, wherein the merits of allowing KiwiSaver scheme managers to utilise the liquidity management tools (LMTs) of side-pocketing and redemption gates is examined in detail. These two LMTs are discussed within the context of the effective LRM of distressed assets. This analysis does not take into account how LMTs like side pockets and redemption gates would be applied to non-distressed private assets. It is more likely that an LMT would be triggered by a KiwiSaver member withdrawal request related to a normal-state, non-distressed private asset than a distressed private asset, given that asset distress is an abnormal and infrequent state.
A non-distressed private asset could trigger an LMT because its valuation and redemption cycles do not coincide with the timing of a KiwiSaver member’s withdrawal request. Moreover, the private asset’s valuation and redemption cycles might not coincide with each other. For example, a private asset might be valued only every six months, with an advance notice redemption window permitted at 90 days afterwards. Thus, depending on when the withdrawal request comes in, it could be up to nine months before the non-distressed private asset could be liquidated and the proceeds either paid out to the scheme member or transferred to another scheme.
How LMTs like side pocketing and redemption gates could be hard-wired into the likes of KiwiSaver trust deeds and disclosure documents to accommodate the normal non-distressed status of private assets would need to be taken into account, as otherwise restricting the use of such LMTs to distressed assets only would then be a deterrent to KiwiSaver scheme managers investing in New Zealand-domiciled private assets. There would also need to be an amendment to KiwiSaver legislation to permit simultaneous membership of two schemes in order to allow side pocketing to be deployed when a member’s transfer to another scheme had to be staged because of investment in private assets.
The Guide places considerable onus on Supervisors to involve themselves with the LRM practices of their supervised managed investment scheme (MIS) managers, including KiwiSaver managers. Supervisors engage with such managers on a risk-weighted basis. Where KiwiSaver scheme managers elected to increase the exposure of their schemes to illiquid private assets, Supervisors would likely increase their engagement with these managers because they would regard the schemes concerned as having become more risky, particularly in relation to LRM, and therefore requiring closer monitoring and supervision. The extra risk includes, but is not limited to:
“FMA’s Document on enabling KiwiSaver scheme investment in private assets provides food for thought on multiple levels beyond the technical changes to KiwiSaver rules that have been proposed,” said Matthew Band, General Manager of Trustees Corporate Supervision at Trustees Executors.
“Through the CTA’s discussions with MBIE and its submission on the Document, Trustees Executors has supported some changes to the current KiwiSaver legislation that would make it easier for KiwiSaver schemes to invest in New Zealand-domiciled private assets.”
“Beyond that, there are wider considerations such as the role that retirement-linked savings vehicles such as the NZSF and KiwiSaver schemes should legitimately be able to play in New Zealand’s national economic growth and development, the latter defined in the Document as the triple objectives of long-term productivity and growth of New Zealand businesses, funding and development of private assets such as infrastructure, and contributing to broader government goals by providing funding to support climate measures such as emissions reductions and adaptation initiatives.”
“Whether KiwiSaver schemes and by extension their members should be called upon to shoulder these kinds of national economic development burdens deserves discussion in its own right.”
“Problems that private assets may incur in listing on the NZX or accessing capital in other ways are not tackled by the Document, but nonetheless merit attention to see what else might be done to ease them beyond relying upon increased KiwiSaver investment.”
“Whether it is prudent or even possible for KiwiSaver schemes to go much beyond present average private asset allocations of 2-3% to approach the approximately 16% average seen in Australia is yet another subject for examination.”
“The Document features some peculiarities in what it considers, such as the omission of non-KiwiSaver retail funds as optional retirement savings vehicles, the limitation of the LMT discussion to distressed asset situations without explicit extension to non-distressed private assets, and the need to treat scheme participants equitably and not just to focus on member withdrawal rights.”
“For Supervisors, material increases in the amounts and proportions of private assets in KiwiSaver schemes lead to questions concerning the kinds of risks that the members of such schemes would be consequently be exposed to, especially if new and different to previous risk exposures.”
“These questions would likely result in greater engagement by Supervisors with KiwiSaver scheme managers who went down the path of substantially increasing their scheme and fund exposures to illiquid private assets, particularly concerning LRM risks.”
“Higher exposures to private assets in KiwiSaver schemes would typically entail such schemes being regarded by Supervisors as at higher risk and therefore requiring closer monitoring and supervision.”
“Notwithstanding the above, KiwiSaver scheme managers should not be discouraged from seeking to improve investment returns and diversify portfolio risks to the benefit of scheme members by exploring opportunities presented by New Zealand-domiciled private assets.”
“If technical tweaks to KiwiSaver rules are needed to enable that exploration to bear fruit, then it is desirable that they should be made.”
“A key point to observe must be that any investment by KiwiSaver scheme managers in such private assets is always done in the best interests of their scheme members, who must all be treated equitably.”
For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matthew Band at [email protected].