Submission to the Commerce Committee

Re: Financial Markets Conduct Bill (Government Bill 342-1)

Member in Charge Committee Chair Deputy Chair Members Hon. Craig Foss Todd McClay Clayton Cosgrove Kawaljit Singh Bakshi David Cunliffe Clare Curran Peseta Sam Lotu-Liga Mojo Matthews Mark Mitchell Jonathan Young

This submission is made by the partners of Matakite Capital, who are the authors of the 6 February, 2012 proposal entitled Creating World Class Portfolios for KiwiSavers (copy attached). This submission addresses issues that have been the subject of industry, media and political attention since the inception of KiwiSaver in 2006, namely, the narrow scope of KiwSaver investments and the lack of impact KiwiSaver has had on primary investment in the productive economy.

Submission
Our submission is that the Financial Markets Conduct Bill should include an amendment to the KiwiSaver Act 2006 that will (i) enable portfolio allocations and diversification that are more typical of long term savings schemes with limited liquidity requirements and (ii) deliver to the New Zealand economy the full benefits associated with the long term capital pool that the scheme was intended to create.

Discussion
KiwiSaver is invested entirely in cash and marketable securities. What is missing from KiwiSaver portfolios is a very large and diverse asset class that we have defined in the attached proposal as Illiquid Assets. These assets typically form a significant share of the portfolios of large pension funds and other long term investors, and include investments that are critical to the New Zealand economy, namely limited partnership investments in forestry, dairy land, film, infrastructure, growth equity and venture capital. KiwiSaver has created a long term domestic capital pool comprised of accounts that are essentially locked-in until accountholder retirement. Some mix of Illiquid Assets would seem to be a logical choice for many of these accounts. Why then, are KiwiSaver managers not offering these kinds of investments? The reason lies in the structure of the scheme itself. While the scheme contains no investment restrictions on its face, it does establish certain limited liquidity and portability rights in favour of accountholders. These rights, even though they may only affect a very small number of accounts at any particular time, effectively require 100% liquidity across the entire KiwiSaver capital pool. Arguably the tail is wagging the dog. KiwiSavers who dont want or need 100%

liquidity/portability for their accounts are being denied access to investments they might otherwise want to participate in. This is an unintended consequence which can be fixed with a very simple amendment to the Act.

Form of Proposed Amendment

We propose that KiwiSavers be permitted to suspend their liquidity and transfer rights with respect to Illiquid Assets only. KiwiSaver account balances not invested in Illiquid Assets would be unaffected and would continue to be subject to the existing liquidity and transfer rules. This amendment would enable managers to include Illiquid Assets in portfolios but would not impose particular investment choices on KiwiSavers as a whole or change the fundamental nature of the KiwiSaver account. Limits would be determined by managers and selected voluntarily by the individual KiwiSaver. Opponents will want to characterize Illiquid Assets as inherently risky and will urge government to take a paternalistic view of investment selection. We believe that Illiquid Assets are no more risky as a class than numerous investments already available to KiwiSavers. We also believe that the architects of KiwiSaver did not intend for the Government to approve or disapprove investment selections. The restriction we have identified is unintentional. This amendment addresses a long standing structural problem with KiwiSaver, the results of which have received considerable commentary from many quarters. There is no good reason to delay resolution of this problem or to consider it separately or as part of a review of other aspects of KiwiSaver. Accordingly we urge consideration of this amendment as part of the Financial Markets Conduct Bill.

Consultation and Support

We have consulted extensively with a large number of industry participants and government officials, including those identified on Exhibit 5 of the attached paper. In addition, the authors have presented the attached paper personally to representatives of the Ministry of Economic Development, the Financial Markets Authority, Treasury, and Inland Revenue during the week of February 20, 2012. This submission has the support of the New Zealand Institute/Business Roundtable, the New Zealand Private Equity and Venture Capital Association (NZVCA), New Zealand Venture Investment Fund (NZVIF), Direct Capital, and Pioneer Capital. Furthermore, we believe - based on our discussions with fund managers - that a significant number of scheme providers would also welcome this amendment.

Matakite Capital March 22, 2012 Adrian van Schie, Phil Veal, Poojitha Preena
Author biographies and further information on Matakite Capital can be found on pages 9 and 10 of the attached proposal.

6 February 2012

Creating World Class Portfolios for KiwiSavers

Enhancing KiwiSaver to allow scheme managers to invest in line with global best practices for long-term investors - Adrian van Schie, Phil Veal, and Poojitha Preena

In July of last year, Prime Minister John Key gave an update on the New Zealand economy to a group of Silicon Valley entrepreneurs and investors with strong links to New Zealand. After the private reception, held in San Francisco, we were talking with the Prime Minister about the state of the investment industry in New Zealand, and the role of KiwiSaver. The scheme, noted the Prime Minister, aims to increase New Zealands household savings rate, promoting asset accumulation over the long-term for the purpose of providing individuals with financial security and independence in retirement. After the meeting, we looked at KiwiSaver portfolios and noticed that they were predominantly short-term. This didnt fit with the characterization of the scheme as long-term. We then looked at asset allocation within KiwiSaver, and thats where things got interesting. Even though KiwiSaver is intended to accumulate assets over the long term, the asset allocation in the scheme looks markedly different from those of other long-term investors. We looked at asset allocations across a representative group of long-term investors (see Exhibit 1). Two things stood out: first, all of the investors held very little cash, and second, all of the investors had a significant proportion of their holdings in illiquid assets such as private equity, venture capital, infrastructure, and real assets. KiwiSaver allocations were dramatically different (based on scheme manager prospectuses for 2011): cash holdings were close to 20%, and illiquids practically zero.

Creating World Class Portfolios for KiwiSavers

So if KiwiSaver is a long-term scheme, why is the asset allocation in KiwiSaver so different from other long-term investors?

For further discussion, see Exhibit 1

KiwiSaver isnt allocated like other long-term investment plans because the current scheme design doesnt allow it.
Why is the scheme the way it is? KiwiSaver is a hybrid, designed to satisfy a number of competing objectives. In designing the scheme, the singular focus was on the problem of getting large numbers of New Zealanders to save voluntarily. How the capital pool would be invested was left for scheme managers to determine. The problem is that the capital pool is in reality a series of puddles. The individual account structure and the various liquidity requirements, which are key elements of a product designed to attract savers, combine to effectively constrain investment managers paradoxically resulting in a relatively stable pool of long-term (locked-in) retirement savings being invested for the short-term.

The fix is simple: Government can amend the scheme to allow for allocations to illiquid assets.
Why implement this solution? Fixing KiwiSaver matters both for KiwiSavers and the New Zealand economy. For individuals, the fix will allow greater diversification, more choice and greater access, and should increase the level of financial literacy and engagement. For the New Zealand economy, the benefits include making some of the accumulated assets of KiwiSaver available for investment in the productive economy.

2 of 27

Creating World Class Portfolios for KiwiSavers

KiwiSaver: hybrid by design

KiwiSaver is a New Zealand-specific scheme, and is not based on any particular foreign model. The design parameters of the scheme are contained in the Final Report of the Savings Product Working Group (the Harris Report)1. Some were stipulated in the Governments Terms of Reference for the report2 these include (1) a method to generate long term savings that contributes to well being in retirement, such as lock-in of contributions until retirement except in limited circumstances and (2) portability of contributions between approved products (emphasis added). In addition, although not stipulated by the Terms of Reference, the working group assumed three further scheme requirements. These were that the scheme would be voluntary, would not necessarily be supported by tax or other financial incentives, and would need high levels of participation in order to achieve its purpose. The working group was given the unenviable task of designing a scheme that could satisfy all of these disparate goals. With their focus on the savings perspective3, the group was particularly concerned that without financial incentives as a quid pro quo for a long-term lock-in, it would be extremely difficult to get high voluntary participation rates. To get savers comfortable with the long-term nature of the scheme, the general lockin concept had to be softened considerably. The scheme does this by recognizing a significant number of life-event based exceptions where an early withdrawal of contributions is possible4. As a result, KiwiSaver became something of a hybrid between a pure locked-in retirement scheme and a general rainy day savings plan. In addition, to satisfy the portability requirement, the scheme gave each individual KiwiSaver the ability to transfer his or her account from one scheme manager to another at any time5. These account transfers are not withdrawals from the point of view of the saver or the scheme as a whole - the money is still locked-in the system. However, from a managers point of view a transfer has exactly the same effect as a withdrawal. They are all liquidity events, requiring the manager to liquidate investments in an amount sufficient to meet the withdrawal request or effect the transfer. These features make the account on demand from the managers point of view essentially requiring complete liquidity for any particular account upon request. The working group understood the compromise created by the desire for a long-term lock-in on the one hand and the requirement for liquidity/portability on the other.

A Future for Work-Based Savings in New Zealand Final Report of the Savings Product Working Group, Peter Harris (Chair), 31 August 2004 2 Harris Report, Appendix 1, p. 77 3 The group was a Savings Product Working Group their singular focus was on implementing a scheme that attracted savings, with very little discussion of investment. This focus was driven by the Governments Terms of Reference for the Group 4 The Terms of Reference allowed for the possibility of early withdrawals, and the report concluded (p. 16), based on a review of comparable schemes, that flexibility in using savings for life stage needs is not inconsistent with the retirement goal 5 This level of individual control is also intended to enhance the sense of individual ownership in accounts and create competition among managers for accounts
1

3 of 27

Creating World Class Portfolios for KiwiSavers

Viewed from the savings perspective this didnt present any particular problem. However, from the investment perspective, these conflicting requirements have created real restrictions.

KiwiSaver: not a pool, just puddles

KiwiSaver is often talked about as creating a pool of capital: this is not the case. KiwiSaver is a defined contribution scheme6, with individual accounts to which individual contributions are allocated. When a liquidity event occurs (which can happen at any time), the manager must be able to account for the full value of the savers account in cash. This compels scheme managers to keep their entire portfolios in cash and liquid securities. This is why KiwiSaver asset allocations do not include illiquid assets and are inconsistent with typical long-term allocation models. Many think that portfolio liquidity can simply be managed because across an entire fund liquidity events only affect a very small percentage of accounts at any given time. Similarly, many think that the problem is one of valuation and that a good valuation methodology would enable illiquid assets to be included in portfolios. Neither of these ideas is valid and the following example shows why. Assume 30% of a fund is invested in illiquid assets and every year there are liquidity requests accounting for 10% of the fund7. The liquidity requests require cash, which can only be generated by selling assets from the liquid part of the portfolio. Nonetheless, every withdrawing accountholder must be paid cash for his/her share of the funds illiquid assets also. Assume the illiquid assets are valued at cost. After five years there will have been a significant shift of risk and value. The remaining accountholders now have 60% of their portfolios in illiquid assets and have effectively paid the withdrawers out of their liquid assets8. If the illiquid assets make a loss the stayers have subsidized the returns of the withdrawers. If the illiquid assets make profit the withdrawers were cashed out below value and the stayers have a windfall. Either way the manager has failed to account for the portfolio assets on an individual basis. No valuation methodology will solve this problem, because it is not a valuation problem. This is a liquidity problem which is about the ability to determine and receive a cash price for an asset within a reasonable period of time. A valuation is not a price. To keep individual balances fairly and equitably adjusted across all accounts the manager needs the ability to constantly liquidate across all asset classes to reflect withdrawals from the pool. Illiquid assets dont necessarily provide that capability, so the scheme is effectively restricted to investment in cash and marketable securities.

Defined contribution schemes are different to defined benefit schemes, where a single pool of capital (i.e. no individual accounts) is managed over time to provide previously determined benefits to participants 7 30% would be a balanced allocation to illiquid assets, and assuming a 10% liquidity requirement seems reasonable given historical transfers and outflows in equivalent Australian funds 8 This example is simplified for illustrative purposes and ignores the effect of new money coming into the fund. However, new money coming in does not change the outcome rather, it just makes it more difficult to see
6

4 of 27

Creating World Class Portfolios for KiwiSavers

KiwiSaver has created a pool that really isnt. The paradox is that the savings are long-term but the investments are short-term.
We think the working assumption of many stakeholders is that managers have the freedom to create appropriate portfolios and are doing so because the inherent limitation created by the scheme design is not obvious or widely understood. We think it can be fixed with a straightforward change to the KiwiSaver legislation.

A solution: an illiquid allocation for those who want it

We propose a change that would give scheme managers an ability to allocate some defined portion of a fund portfolio to illiquid assets. For example, a scheme manager might offer a balanced fund product that would stipulate that up to 25% of fund capital could be committed to illiquid assets9. Whenever that manager makes a commitment to an illiquid asset, the commitment would be allocated pro rata across all the accounts in the fund. Each savers allocations would then become fully locked-in until the underlying investment is realized. The balance of the account would be unaffected and would remain available to the saver as contemplated by the Act10. In essence our proposal is that the Act should allow individual KiwiSavers to voluntarily suspend their statutory liquidity rights with respect to a discrete portion of their savings they would agree to do this simply by selecting a fund that has this feature. The saver gives up liquidity in order to get access to long-term investment opportunities that she cannot otherwise access. This will enable KiwiSavers who want long-term portfolios to choose them.

The percentage would depend on the profile of the fund a balanced fund might have an allocation of between 20-30%, while an aggressive growth fund might have more than 50% - see Exhibit 1 for discussion and some data on asset allocations 10 For a more detailed discussion on how this change can be made, see Exhibit 3
9

5 of 27

Creating World Class Portfolios for KiwiSavers

Why this needs to happen for KiwiSaver and New Zealand

For KiwiSavers, diversification matters KiwiSaver is not about saving for its own sake. Savings was the immediate goal but the long-term purpose was to allow New Zealanders to accumulate assets and increase retirement benefits independent of government11. KiwiSaver is a savings and investment scheme and because each one feeds the other it must succeed at both levels. Also, its success or failure has ramifications that go beyond scheme participants. A failure of KiwiSaver will impact all future taxpayers because it will increase the dependence of future retirees on government, which will in turn increase future tax burdens. The fact that KiwiSaver managers are effectively restricted to investing in cash and marketable securities impacts the scheme and its participants in a number of ways. Firstly, the restriction limits options for diversification. We understand that the Act does not mandate diversified portfolios and we are not suggesting it should12. Nonetheless, given that diversification is a cornerstone of investment management practice we dont believe the Act should operate to restrict it. Illiquid assets are a significant and diverse global asset class, providing numerous, often unique opportunities for geographic, sector and risk/reward profile diversification. Secondly, the concentrations in cash and marketable securities have associated costs. Holding large cash reserves means less money is productively invested. Marketable securities present a different problem. Because they are tradable, managers tend to trade them perhaps more than they need to - in order to avoid a short-term loss or to garner a short term gain. This practice can impose significant transaction costs. Thirdly, the restriction limits access. Participation in a larger scheme like KiwiSaver should bring access to a broader range of asset classes than are available to individual investors. That hasnt happened. KiwiSavers today are getting the same investment products through KiwiSaver as they could get as individuals outside the system. Fourthly, the restriction limits choice. Creating access to new asset classes broadens choice, can enhance individual engagement and will increase financial literacy in those new asset classes at the scheme manager level and possibly at the individual saver level.

11

This is reflected in the stated legislative purpose of the Act, which is to encourage a long-term savings habit and asset accumulation by individuals The Act aims to increase individuals well-being and financial independence, particularly in retirement, and to provide retirement benefits 12 We note that the Australian Superannuation Industry (Supervision) Act 1993 requires that Trustees must invest prudently with consideration given to diversification and liquidity. Liquidity is not paramount it is given equal weighting with diversification. In New Zealand, the Trustee Act (which sets the standard for KiwiSaver) does not provide a similar mandate. However, it lists as the first matter to which trustees may have regard in exercising their power of investment the desirability of diversifying trust investments

6 of 27

Creating World Class Portfolios for KiwiSavers

Given these outcomes, the need for a long-term perspective is particularly important in a scheme that has a high proportion of young savers13. And beyond the effects on KiwiSaver and its participants, the restriction has a direct effect on the broader economy. For New Zealand, investment in the productive economy requires illiquids Numerous governmental and non-governmental agencies and commentators14 identify the need for domestic capital and investment in the productive economy. Foreign capital is not a complete substitute for domestic capital because foreign capital tends to flow only into certain select sectors of the capital markets and not at all into others. Investment in the productive economy - especially equity investments in growing New Zealand companies - are not well supported by foreign capital and therefore look principally to domestic capital sources for investment15. KiwiSaver appears to be heavily invested in the domestic economy. Indeed, supporters have always assumed that it would be: [KiwiSaver] will swell the base of capital funds in New Zealand and the availability of that pool of funds, so that New Zealand companies can more readily access the capital they need to grow their businesses.16 Furthermore, there is an emerging consensus that increasing the savings rate in New Zealand would improve productivity and prosperity by providing greater availability of capital for productive businesses.17 However, much of that investment is cash and debt18 and the portion that is equity is almost entirely public company shares. Share trading on the public market does not directly provide investment capital to New Zealand companies. Trading shares is a secondary market transaction, which delivers no proceeds to the underlying business. Money changes hands between buyer and seller, so while the transaction may constitute an investment from the buyers point of view, there is no actual investment in the issuer. Secondary market activity supports the status quo but doesnt build anything new. This distinction between buying and selling activity (mergers and acquisitions) and green field investment is noted by other sources19. Equity investments in unlisted New Zealand enterprises will almost always be in the form of illiquid assets20. With New Zealanders now saving and accumulating significant amounts of capital domestically, it seems perverse that they cant choose to participate in domestic financings of this kind. Excluding important segments of the New Zealand economy from access to a large and growing domestic capital

According to Financial Markets Authority data, 60% of KiwiSavers are under 40 (with 25 years before they are eligible for retirement) and 35% are under 25 (40 years before retirement) 14 Including Treasury in New Zealand Financial Markets, Saving and Investment Treasury Policy Perspectives Paper 07/01, and Capital Shallowness: A problem for New Zealand? Treasury Working Paper 05/05. Also read Capital Markets Matter, and Franceska Banga (Chief Executive NZVIF) in her speech to the ICE Ideas conference, 8 July 2011 15 This is discussed in greater length on pp. 13 24 of Home is where the money is: The economic importance of savings, David Skilling, New Zealand Institute, February 2005 16 Gordon Copeland MP, KiwiSaver Bill Reading in Committee of Whole House, NZ Parliamentary Debates (Hansard) for Tuesday August 29, 2006 17 Rick Boven, Savings Debate Too Narrowly Focused, New Zealand Institute, 14 September 2010 18 Some commentators argue that excess cash in the scheme supports the balance sheets of financial institutions, and not the productive economy 19 See p. 20 of Home is where the money Is 20 See Exhibit 2 for examples and discussion
13

7 of 27

Creating World Class Portfolios for KiwiSavers

source forces those segments to either find capital offshore (with consequent balance of trade impacts) or go without necessary capital (with consequent impacts on growth). Sadly, even though KiwiSavers are not investing in the productive economy, our cousins across the Tasman are piling in21: Australian capital is now flowing into New Zealand because they have so much capital in their savings schemes that they are struggling to find good domestic investment opportunities.

KiwiSavers arent invested like typical long-term investors because the current structure of the scheme inadvertently restricts the investments that managers can make. Government should remove the restriction by amending the Act. Such an amendment would be consistent with the objectives and purposes of the Act, and would benefit KiwiSavers and the New Zealand economy.

21

See Anzac Love Affair

8 of 27

Creating World Class Portfolios for KiwiSavers

About this document

This is an ad hoc private proposal and has not been solicited by, or endorsed by, any organization or individual, public or private. In preparing this proposal, we have had a series of conversations with government officials and industry participants, including many of the stakeholders identified in Exhibit 5. We have also reviewed a significant amount of background material, including the reports, reviews and commentaries listed in the References. We believe the next step is for Government to consider making the appropriate changes to the KiwiSaver legislation, as outlined in this proposal.

About the authors

Living in the United States, Adrian van Schie, Phil Veal and Poojitha Preena are passionate New Zealanders who maintain strong ties with their home country. Collectively, they have over 50 years experience in working with global private equity and venture capital funds in various capacities. Preena, Veal and van Schie are the founders of Matakite Capital, the sole purpose of which is to establish New Zealand partnerships that will give New Zealanders cost-effective access to leading global private equity and venture capital opportunities.

Adrian van Schie

avanschie@matakitecapital.com

Adrian is a Founding Partner of Matakite Capital. He is an experienced private equity lawyer with a significant track record in leveraged buyouts, recapitalizations, mergers, stock and asset acquisitions, spin-offs, subordinated debt and debt investments, bank and mezzanine financings, corporate restructuring, and earlystage venture capital investments both as issuers and investors counsel. Prior to founding Matakite, Adrian was Partner in the private equity group at Kirkland & Ellis LLP in New York. At Kirkland, he served as principal legal counsel in various transactions to numerous buyout funds and hedge funds, including Avista Capital Partners, Bain Capital, Citicorp Venture Capital, Insight Venture Partners, Pacific Equity Partners, Perry Strategic Capital, and many more. Adrian serves on the board of trustees of Alumni of the University of Otago in America. He is the published author of the book Insider Trading, Nominee Disclosure and Futures Dealing: An Analysis of the Securities Amendment Act 1988 (Butterworths, 1994). Earlier in his career, Adrian was a banking and finance lawyer at Buddle Findlay in Wellington, and served on the staff of the New Zealand Securities Commission. He also served in the New Zealand Army, Territorial Forces. Adrian has an LL.M degree from the University of Chicago, and a LL.B with Honours and a B.Com. (Economics) from the University of Otago. He is admitted to the bar in New Zealand and in New York. Adrian was educated at Otago Boys High School. His interests include trail running and multisports. He is married, with two sons, and lives in New York City.

9 of 27

Creating World Class Portfolios for KiwiSavers

Phil Veal

pveal@matakitecapital.com

Phil is a Founding Partner of Matakite Capital. He is a seasoned operating partner, with over 20 years experience in growth, merger integration, and restructuring in public and private capital markets. In addition to his role at Matakite, Phil is also a Director at middle market advisory firm Growfire. Prior to joining Growfire, Phil launched global project management services company PIPC in the Americas in 2004. In May 2010, Cognizant (NASDAQ:CTSH) acquired PIPC. Phil is a Director of Kea, New Zealands global business network, and he also serves on the board of non-profit education fund ANZA, the American New Zealand Association, plus the advisory boards of financial services technology company Align, and wine company Communal Brands. He is an active investor in early stage businesses in New Zealand, and is a member of ICE Angels (Auckland). Earlier in his career, Phil was an engineer working on a series of infrastructure projects including the London Underground Jubilee Line Extension (UK), the Tsing Ma Bridge/Lantau Crossing (Hong Kong), and the Heathrow Express rail line (UK). Working for British management consulting company PA Consulting, he advised on merger and acquisition programs for a range of Fortune 500 companies including AstraZeneca, BP, Deutsche Bank, Sveaskog, and Verizon, and private equity investors including Madison Dearborn Partners. Phil has a B.E. (Hons) degree from the University of Canterbury, and is a graduate of Timaru Boys High School. His other interests include alpine mountaineering and backcountry skiing. He is married, with four daughters, and lives in New York City.

Poojitha Preena

ppreena@matakitecapital.com

Poojitha is a Founding Partner of Matakite Capital. He is a seasoned venture capital advisor and investor, with over 15 years experience in starting, running, and exiting high-growth technology companies. In addition to his role at Matakite, Poojitha is also a Principal at boutique advisory firm GR Partners. Poojithas recent clients include Dropbox, Socialcast (acquired by VMware), Payfone, Networked Insights, and eBay. Poojitha is also a founder and advisor to Betaworks, an early stage incubator and investor in real-time social web companies. Recent investments by Betaworks include Facebook (through the acquisition of Hot Potato), Twitter (through the acquisition of Summize and TweetDeck), Groupon (through the acquisition of Mob.ly), tumblr, and bit.ly. Earlier in his career, Poojitha served in a variety of executive positions at Jangl (acquired by Telefonica), Certicom (acquired by RIM), and Skype (acquired by eBay), where he was the first US employee. He has also worked in the Office of Strategy & Technology at Hewlett Packard, and started his career as a management consultant at Scient. In addition, Poojitha sits on the advisory boards of several technology startups around the world. Poojitha is a graduate of Kings College in Auckland. His other interests include travel and consumer technology. He is married, with one son, and lives in San Francisco.

10 of 27

Creating World Class Portfolios for KiwiSavers

References
Government and Government-sponsored papers
A Future for Work-Based Savings in New Zealand Final Report of the Savings Product Working Group, Peter Harris (Chair), 31 August 2004 Capital Markets Matter Report of the Capital Markets Task Force, Rob Cameron (Chair), December 2009 Capital Shallowness: A problem for New Zealand? Treasury Working Paper 05/05, Julia Hall and Grant Scobie, New Zealand Treasury, June 2005 Evaluation of the Venture Investment Fund, Ministry of Economic Development, November 2009 Investing in a low inflation world, Dr. Alan Bollard, 14 October 2003 KiwiSaver Evaluation of Supply Side Impacts, Ministry of Economic Development, November 2008 KiwiSaver Evaluation - Annual Report July 2010 to June 2011, Evaluation Services, Inland Revenue, September 2011 KiwiSaver: An Initial Evaluation of the Impact on Retirement Saving WP 11/04, David Law, Lisa Meehan and Grant M Scobie, New Zealand Treasury, December 2011 National Strategy for Financial Literacy, Savings Working Group Update, December 2010 New Zealand Financial Markets, Saving and Investment Treasury Policy Perspectives Paper 07/01, Linda Cameron, Bryan Chapple, Nick Davis, Artemisia Kousis and Geoff Lewis, New Zealand Treasury, October 2007 Report of KiwiSaver Supply Side Evaluation, Ministry of Economic Development, July 2010 Report of the Financial Markets Authority (in respect of the KiwiSaver Act 2006) for the year ended 30 June 2011 (pursuant to Section 194 of the KiwiSaver Act 2006) Retirement Income Report 2003, Periodic Group Report, Vance Arkinstall (Chair), 19 December 2003 Saving and Growth in an Open Economy Treasury Working Paper 01/32, Iris Claus, David Haugh, Grant Scobie and Jonas Tornquist, 2001 Saving in New Zealand Issues and Options, New Zealand Treasury, September 2010 Saving New Zealand: Reducing Vulnerabilities and Barriers to Growth and Prosperity, Savings Working Group Final Report to the Minister of Finance, January 2011 Submission to Savings Working Group, Reserve Bank of New Zealand, November 2010 Towards Consensus on the Taxation of Investment Income Report to the Minister of Finance and Revenue, Craig Stobo (Chair), October 2004

11 of 27

Creating World Class Portfolios for KiwiSavers

Parliamentary proceedings
Parliamentary Debates, Thursday 2 March 2006, KiwiSaver Bill First Reading (Hansard) New Zealand Parliamentary Library - Bills Digest No. 1334, 02 March 2006, KiwiSaver Bill 2006 New Zealand Parliamentary Library - Bills Digest No. 1412, 23 August 2006, KiwiSaver Bill 2006 (2006 No 21-2) As reported from the Finance and Expenditure Committee: 21 August 2006 Parliamentary Debates, Thursday 24 August 2006, KiwiSaver Bill Second Reading (Hansard) New Zealand Parliamentary Library - Bills Digest No. 1414, 29 August 2006, KiwiSaver Bill 2006 (Supplementary Order Paper 2006 No 52 (Government)) Date of Release: 28 August 2006 Parliamentary Debates, Tuesday 29 August 2006, KiwiSaver Bill In Committee (Hansard) Parliamentary Debates, Wednesday 30 August 2006, KiwiSaver Bill Third Reading (Hansard) New Zealand Parliamentary Library - Bills Digest No. 1533, 14 August 2007, Limited Partnerships Bill 2007 Parliamentary Debates, Tuesday 11 March 2008, Limited Partnerships Bill Third Reading (Hansard)

Non-government publications and academic papers

Australias Choice of Fund Legislation: Success or Failure? Joshua Fear and Geraldine Pace, Rotman International Journal of Pension Management, Vol. 2, Issue 2, Fall 2009 Determinants of Portfolio Performance, Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, The Financial Analysts Journal, July/August 1986 Ensuring Venture Capital plays its part in growing the New Zealand Economy, New Zealand Private Equity & Venture Capital Association, November 2011 Growing the New Zealand Economy the need for domestic capital, David Skilling, New Zealand Institute, June 2006 Home is where the money is: The economic importance of savings, David Skilling, New Zealand Institute, February 2005 Ideas to move the nation, speech to ICE Ideas Conference, Franceska Banga, 8 July 2011 Investment, Savings and Growth, David Skilling, New Zealand Institute, November 2004

12 of 27

Creating World Class Portfolios for KiwiSavers

Its not just about the money: the benefits of asset ownership, David Skilling, New Zealand Institute, October 2004 KiwiSaver: Four Years On Working Paper 2011-2, University of Auckland Business School, Retirement Policy and Research Center, December 2011 Opportunity for a lifetime: creating an ownership society in New Zealand, David Skilling, New Zealand Institute, April 2005 Savings Debate Too Narrowly Focused, Rick Boven, New Zealand Institute, 14 September 2010 Submission to the Finance & Expenditure Select Committee on the KiwiSaver Bill, New Zealand Institute, April 2006 The wealth of a nation: the level and distribution of wealth in New Zealand, David Skilling, New Zealand Institute, July 2004

Media and other articles

Anzac Love Affair, Franceska Banga, Unlimited, 21 September 2008 Dunne calls for superannuation flexibility, Colin Williscroft, National Business Review, 21 July 2011 How the FMA can open up KiwiSaver, David Chaplin, New Zealand Herald, 20 December 2011 KiwiSaver back in the money, Eloise Gibson, Business Day, 27 January 2012 KiwiSavers default setting short changing many investors, John Body, New Zealand Herald (Opinion), 31 January 2012 Many KiwiSaver funds playing it too safe, Brian Gaynor, New Zealand Herald, 10 December 2011 Public Pensions Increase Private-Equity Investments, Michael Corkery, Wall Street Journal, 26 January 2012 Show us the money, Mike Booker, Idealog, 30 January 2009 Time to tinker with KiwiSaver, Rob Stock, Sunday Star Times, 20 January 2008 Well save money by spending less, not by investing less, Bernard Hickey, New Zealand Herald, 12 May 2011

13 of 27

Creating World Class Portfolios for KiwiSavers

EXHIBITS

EXHIBIT 1 Asset allocation EXHIBIT 2 What are illiquid assets? EXHIBIT 3 Proposed structure EXHIBIT 4 Further questions EXHIBIT 5 KiwiSaver stakeholders

14 of 27

Creating World Class Portfolios for KiwiSavers

EXHIBIT 1:

Asset allocation: leading long-term investors have significant allocations to illiquid assets
We reviewed the asset allocation models of three representative groups of long-term investors investors who, like typical KiwiSavers, have a long-term investment horizon, limited liquidity requirements, and an objective to accumulate assets. The three groups we chose were: university endowments, public pension funds, and High Net Worth individuals (as recommended by their private wealth advisors). We focused on United States investors because the US is a mature investment environment with good data available. Our review included: Five of the largest endowment funds in the United States (university endowments, with combined assets under management of over $80bn): Duke, Harvard, MIT, Stanford, Yale. Five of the biggest public pension funds in the United States and Canada (public sector employee schemes, with combined assets under management of over $600bn): CalPERS, CalSTRS, NJPERS, Ontario Teachers, Texas Teachers . Five of the largest High Net Worth private wealth advisors: Citibank, Goldman Sachs, J.P. Morgan, Merrill Lynch, Morgan Stanley.

We noted that different investors often describe asset classes differently: we grouped assets into the appropriate classes by making assumptions about the liquid/illiquid nature as appropriate (taking into account that the assets have varying degrees of liquidity). The allocation models of all three groups featured significant weighting of illiquid assets, with college endowments leading the way with an average of nearly 60% in illiquids such as private equity, venture capital, hedge funds, real estate and real infrastructure assets (directly owned). All three groups held very low percentages of their portfolios in cash (typically only 1-2%), with the balance in liquid assets such as equities and bonds.

Table 1. Balanced asset allocation for representative long-term investors compared to KiwiSaver

Comparing these figures to the aggregate allocation for KiwiSaver22 across all scheme members (Table 1), there are two significant differences: firstly, there is virtually no illiquid
22

Based on aggregate data from KiwiSaver scheme managers prospectuses in 2011

15 of 27

Creating World Class Portfolios for KiwiSavers

allocation in KiwiSaver, and secondly the allocation to cash is an order of magnitude higher that we see in leading long-term investors. We also note that the data shows that all long-term investors have some allocation to illiquid assets, regardless of their profile. The illiquid asset class is not just for growth investors its a legitimate and necessary allocation choice for all investors. New Zealand Herald commentator and investment manager Brian Gaynor notes, There are two main investment decisions, asset allocation and individual security selection. The former is by far the most important, although most investors focus on the latter23. The trend to growing and continuing significant allocations to illiquid assets is not a recent one: it started decades ago and it continues in 201224.

Many KiwiSaver funds playing it too safe, Brian Gaynor, New Zealand Herald, 10 December 2011. The importance of asset allocation in portfolio performance was first popularized by Gary Brinson et al in their 1986 Financial Analysts Journal article Determinants of Portfolio Performance 24 See Public Pensions Increase Private-Equity Investments, Michael Corkery, Wall Street Journal, 26 January 2012
23

16 of 27

Creating World Class Portfolios for KiwiSavers

EXHIBIT 2:

What are illiquid assets?

What we refer to as illiquid assets go by many different names. However, for our purpose, illiquid assets are investments that typically have a number (but not necessarily all) of the following characteristics. Chunky. The investment opportunity is not retail, i.e. its not offered to the public. This means a relatively small number of investors and relatively large investment increments. A minimum investment may be measured in the hundred thousands or millions and may not be divisible into smaller units. This in itself is an impediment to transferability. Opaque. Because they are not subject to public company reporting requirements financial disclosures will vary in frequency and content reports may not be audited this makes accurate valuations difficult. Even with good reporting valuation can be an issue just because of the nature of the underlying business e.g., fast growing businesses, businesses doing a lot of R&D or otherwise having uncertain timelines and returns are hard to value even with good information. Indefinite. These investments are generally partnership interests or other equity securities that only get realized in connection with an extraordinary transaction (e.g. sale or IPO of the underlying business). Until this happens there will be no or very limited transferability there is no market - if transfers are permitted they are infrequent, based on negotiated valuations which require long execution times and often subject to illiquidity and minority discounts. Cash Flow Negative Early. These investments normally pay no dividends and offer no returns except in connection with an extraordinary transaction. In addition, they frequently require a commitment to invest which is funded over time by a series of intermittent payments not a one-time investment. Often these investments have negative returns during early years as capital goes into building the underlying asset or business and nothing comes back out.

On the face of it these characteristics seem very unfriendly to investors. That is because they are not driven by the requirements of investors. They are driven by the needs and priorities of the underlying business or asset. Obviously, if the underlying business succeeds, this will ultimately be reflected in the value delivered to the investors. Illiquid assets are not unique to certain kinds of business. They can be found in every industry and every size and type of business regardless of complexity or stage of development. They can be found wherever conventional sources of financing are either not available or are unsuitable for some reason. Typical reasons that owners or managers might not want to raise public capital include (i) they want complete control of the capital structure which they cant get in a public or widely held company (e.g. they dont want to fight change of control bids initiated because of valuation issues), or (ii) they want to focus 100% of their time and attention on the business, or (iii) they want to avoid disclosure, compliance expense and restrictions associated with public filing, as well as the public market focus on quarterly reporting and the distraction of public market volatility. Examples are as follows. Very simple assets such as forestry, certain types of infrastructure assets, real estate based assets (whether agricultural or urban) dont require the complexity of a listed company for their management and ownership structure and dont necessarily want the burden of complying with requirements for listing on public equity markets. New Zealand example: Roger Dickie Forestry Partnerships.

17 of 27

Creating World Class Portfolios for KiwiSavers

Project financing (greenfield or growth/expansion) examples include film production, new manufacturing plant, infrastructure projects, - anything front end investment heavy with no income until the project ends. Sometime timeline and costs are uncertain. Public equity is too uncertain and maybe too expensive. Debt availability is very limited because it cant be serviced, at least until the asset is completed and starts generating some cash flows. New Zealand example: Pacific Fibre, or the Second Harbour Crossing in Auckland. Small companies seeking growth or expansion capital, and/or startups public equity is too expensive, friends & family financing is not enough, and traditional bank debt is not available. New Zealand example: 42 Below. Fast growing companies - working capital needs outstrip revenue growth therefore traditional borrowing not suitable public equity raising is too slow and too expensive. New Zealand example: NDA Group. R&D heavy companies cost sensitive, front-end loaded, may not want public disclosure because of security/secrecy issues. New Zealand example: Lanzatech.

These kinds of assets can be invested in directly or through a specialized collective vehicle or fund. Sometimes this class of assets is referred to as alternative investments. Typically, whether the investment is direct or through a fund, the investment vehicle will be a limited partnership of the type specifically created by the Limited Partnerships Act 2007 to support this kind of investment activity in New Zealand. KiwiSaver scheme managers will likely not have expertise to select and manage direct investments but will allocate to professionally managed single purpose vehicles or to funds which will build illiquid asset portfolios. These funds can be focused geographically, by industry or by stage of development and will include Private Equity, Growth Equity, Venture Capital, Leveraged Buy-Outs, Distressed Debt, Absolute Return, Hedge, Infrastructure, Real Estate, Energy, Healthcare, etc. They will also include Funds of Funds, which aggregate a number of funds under one umbrella to provide greater access and diversification to investors with more modest capital pools.

18 of 27

Creating World Class Portfolios for KiwiSavers

EXHIBIT 3:

Detail of proposed structure

In this attachment we detail some of the basic elements of our proposed structure, including necessary amendments to the KiwiSaver Act.

Creating funds with illiquid allocations

Amend Existing Funds. We want managers to be able to include an illiquid allocation in existing funds, with disclosure and time given to savers to enable those savers to analyse the proposed change and transfer to other funds if they so desire.. Establish Parameters. The manager would determine the parameters. Typically this would be expressed as a maximum (cap) i.e. the manager may make illiquid investments that will not exceed a specific percentage of the funds total value at the time the investment commitment is made. There should be no minimum commitment - opportunities may be limited and managers may not find suitable investments. Allocate Commitments Across Accounts. At the time a manager commits to make an illiquid investment the manager allocates the amount of the commitment across all of the accounts in the fund pro rata based on account balances as a percentage of the total fund value on the commitment date. Amounts so allocated would become fully locked-in for the life of the illiquid commitment/investment. Even if the accountholder transfers or withdraws after this date, the locked-in portion stays with the original fund. Fund Commitments. When the time comes to fund commitments to illiquid assets, the funding would be in accordance with the established allocation. Accountholders who have withdrawn or transferred would still be funding their share, with no impact on other accountholders in the fund. Distribute Returns. Returns on illiquid assets would be distributed in accordance with commitments funded. o If the accountholder is still in the fund, proceeds go back into the relevant account, where some percentage will be available for further reinvestment into illiquid assets. o If the accountholder has transferred from the particular KiwiSaver fund (and still maintains an account at the same or different KiwiSaver scheme provider) the proceeds go to the accountholders new KiwiSaver account. o If the accountholder has withdrawn from KiwiSaver (including death or emigration) the proceeds go as directed by the accountholder or his or her legal representative.

Required Amendments
We think the structure outlined above could be achieved without any major structural change to the Act. In fact, all that is needed to suspend the various liquidity requirements is to add one sentence to the definition of members accumulation in Section 2:

excluding, for the purposes of Clauses 4, 7, 8, 9, 10, 12, 14 and 16 of the KiwiSaver Scheme Rules, allocations to illiquid assets until such time as they are realized for cash.

19 of 27

Creating World Class Portfolios for KiwiSavers

Other necessary or desirable conforming changes include: KiwiSaver Scheme Rules: a new rule would need to be added recognizing illiquid allocations and specifying disclosure and notice period before allocation comes into effect. Under Section 126 of the Act this would effectively amend the relevant trust deeds and eliminate costs of piecemeal amendments. Sections 119A and 129 may need to be considered also and Clause 7 of the Rules should be conformed to refer to accumulations rather than funds. Clause 5(1) of KiwiSaver Scheme Rules Lump sum requirement: this section would need to recognize that illiquid asset allocations will not be part of any lump sum. Section 53 Multiple account restriction: this section would need to recognize that illiquid asset allocations do not constitute a separate account, so that if a saver transfers his or her liquid portions to a new manager, leaving the illiquid allocation behind as proposed, the saver is treated as being only one account for the purposes of Section 53. Section 56(3): this section should be amended to make it clear that managers can satisfy the requirement to transfer by transferring securities in kind25. Part 4 Subpart 5 (Winding Up): in the event a fund is wound up, there needs to be somewhere for the illiquid assets to be held pending realization. One suggestion is to nominate a default trustee to hold these assets: a manager is not really required, and would present an unnecessary level of cost and administration.

25

This change is peripheral to our proposal. However, we noted when talking with managers that the prevailing practice on transferring accounts under Section 56 is to liquidate all securities entirely and transfer the cash proceeds. This practice imposes unnecessary transaction costs. We suggest that Section 56 is clarified to provide that when a saver chooses to transfer an account, to the greatest extent possible, the actual securities held in the account are transferred in kind, rather than sold or realized for cash with net proceeds being transferred. A similar change may be desirable in Clause 7 of the KiwiSaver Scheme Rules.

20 of 27

Creating World Class Portfolios for KiwiSavers

EXHIBIT 4:

Further questions
The purpose of this paper is to propose change, but not without first encouraging discussion. We anticipate there will be many questions to be addressed. We cannot anticipate them all. Here are a few, together with our responses.

Are you saying that all KiwiSavers should be holding illiquid assets? No. Our proposal does not mandate illiquid assets as part of every portfolio mix nor are we proposing that individuals make their own illiquid asset investments. Our proposal is simply to permit managers who want to include an illiquid allocation in a particular fund to be able to do so. Funds that want to remain solely in cash and liquid securities are welcome to do so. KiwiSavers can chose funds that have allocations and strategies that they like. Like many of the other aspects of KiwiSaver, participation would be voluntary. Are illiquid assets really suitable for retail investors? The legislation does not take a paternalistic approach to asset selection - i.e. what is suitable and what is not - and we dont believe that it should. This reflects the spirit of the Harris Report, which determined to give savers a significant amount of individual responsibility and which also noted that over regulation stifles innovation [of investment products]. So it seems that offering products with an illiquid asset component is consistent with scheme design principles. In fact, one of the conclusions of Capital Markets Matter was that retail investors must have available a range of quality financial products. Our proposal will permit expansion of the range of products currently available. Because KiwiSaver represents long-term savings, illiquid assets are a legitimate way to get retail investors into long-term investments. Are illiquid assets too complicated for KiwiSaver? Not necessarily. Some might say these investments are too complicated for KiwiSavers to understand or that more choices will confuse savers. The Harris Report (p. 17) was wary of the fact that many savers/investors suffer from choice overload which can paralyze even the basic decision to save/invest. We dont think our proposal will add to the possibility of overload in the system because we do not propose any change to the savers role - the saver still selects only picks the fund manager and the general profile of the fund the manager determines the allocation percentage, the criteria for investments for which the allocation can be used and ultimately, the investments themselves.

21 of 27

Creating World Class Portfolios for KiwiSavers

Arent illiquid assets riskier than marketable securities? It is true that liquidity is viewed as a risk mitigation tool that is, the risk of the investment is (theoretically) reduced, because if the value of the investment starts to erode, you can get out by selling the investment into the market (perhaps at a loss, but hopefully a smaller loss than might be suffered ultimately) liquidity is also an optimization tool you can move to the best performing investment for any given timeline an analysis of the validity of these ideas is well beyond the scope of this paper but we would say that to truly capture the value of these benefits an investor has to beat the market which moves quickly to adjust price for risk. Further, liquidity can disappear when you need it most. Liquidity has associated costs that are not present in illiquid assets churning, volatility, insider trading risk, etc. in the end its a complex cost/benefit analysis. Arent illiquid assets less transparent than marketable securities? True, but is there really any meaningful transparency in a constantly changing public portfolio? No investor has time to read and analyse the financial reports and disclosures of every company in their funds portfolio like it or not they are relying on managers the same would be true with an illiquid asset. Reporting in some sense is moot if there is no liquidity you cant act on the information by selling out the protection in an illiquid asset is that all the investors are in the same boat and generally exit at the same time the insider trading risk is reduced in a public investment the transactions of insiders need to be constantly monitored to ensure you dont get left behind. Dont KiwiSaver accounts already contain illiquid assets? Many think that KiwiSaver portfolios are already diversified into some of the asset classes included in illiquid assets. This is not the case. Some KiwiSaver funds are marketed as containing infrastructure or real estate assets, but typically these are tradable securities that represent portfolios of existing (and sometimes relatively old) assets. These assets have been bundled together by investment banks to generate particular kinds of income streams. We make no comment on the merits (or otherwise) of these kinds of investments, but they are fundamentally different in character to the kinds of illiquid assets we refer to. Wont illiquid assets just add another level of fees? Fee levels are a legitimate concern when assessing any investment product. However, the fees debate is often very narrowly focused and doesnt take account of several important points; Fees cannot be looked at in isolation from returns. This point was made in the Harris Report (p.37) although it seems to have escaped some commentators.
22 of 27

Creating World Class Portfolios for KiwiSavers

Many fee comparisons fail to take account of hidden costs in a number of investments that appear cheaper from the investors point of view. Some examples: (1) public companies are in reality relatively high cost investment vehicles, (2) bundled assets often have significant fees already embedded, plus there are additional and ongoing management fees, (3) unitized illiquids have an administrative cost structure. The Harris Report notes that fee caps dont work. They result in low quality managers offering very basic, low quality products. This needs to be remembered when the fee question is considered. Will your proposal fix KiwiSaver allocations? We are not saying our proposal will fix allocations. All we are saying is that our change will make allocations fixable if managers are prepared to make the allocation decision and KiwiSavers are prepared to select the portfolios offered by those managers. We acknowledge that the way KiwiSaver is currently allocated likely has contributing causes beyond the restriction we have identified, including; Constant competitive pressure on managers to consistently report shortterm performance, which paradoxically drives managers to trade, and prioritize short-term returns. Pressure from savers not to risk loss of capital (at any cost). Many New Zealand savers perceive cash as a safe haven where principal value can always be preserved. High cash concentrations may also be driven by managers desire to avoid market volatility liquid securities trade in what are currently highly volatile markets and so are subject to large short term valuation changes. Without access to illiquid assets managers have a paucity of other options if they want to stay away from market volatility so they hold cash. Yield is a priority many New Zealand savers have a propensity for income investments with a high degree of security. Surely the KiwiSaver Act intended to restrict investment choice? We see no evidence of this. The Act itself contains no limitations on what kinds of investments can be held by scheme managers26. Likewise, the fund structure does not restrict the kinds of assets that can be held27. The Harris Report Terms of Reference specifically asked what limitations, if any, should be placed on the

Clause 1. E(1) KiwiSaver Rules - Investment of Scheme Money requires only that KiwiSaver moneys are invested in accordance with the provisions of the Trustee Act 1956. Section 116G of the Act Investments and Property of KiwiSaver Schemes prescribes how legal title should be held, and contains no restrictions on investment or asset type 27 The PIE Structure, which results from the recommendations contained in Towards Consensus on the Taxation of Investment Income Report to the Minister of Finance and Revenue, Craig Stobo (Chair), October 2004, requires only that assets be passive investments, there is no prescription of liquidity
26

23 of 27

Creating World Class Portfolios for KiwiSavers

investment profiles of KiwiSaver products? The report did not consider limiting asset classes or restricting investment options in any form this was left completely open. We think if there was an intention to restrict it would have been expressed. Our assumption is that the Act intended that managers be given the discretion to create portfolios and asset mixes that would be appealing to different classes and ages of KiwiSavers. The features of the scheme that effectively create the de facto investment restriction were not intended to do so these features were driven by the desire to improve participation and savings not by a desire to restrict investment strategies. Do you think KiwiSaver needs radical reform? No, and what were proposing isnt radical. We are not proposing eliminating the individual account structure - it is important for ownership and engagement. Nor do we propose eliminating the liquidity options for life events or even the unrestricted transferability feature these are key elements that serve important purposes. What we are proposing is consistent with existing hybrid nature of KiwiSaver, allowing an accountholder to hold an account with both a liquid balance and an illiquid balance this leaves all the existing architecture in place but enables the creation of an illiquid pool where capital can access illiquid assets, domestic and international. We think this is a simple and cost effective approach important considerations driven by the broad based nature of the scheme that necessarily includes a large number of small accounts. Does the legislation really need to be amended? It is theoretically possible for a scheme manager to offer a fund where individual KiwiSavers could agree by individual contract to suspend their statutory liquidity rights. However, this kind of contracting out would involve complex and expensive legal drafting by scheme managers lawyers, lots of oversight from Trustees lawyers who ultimately might be too conservative to let it happen and would likely result in documents too complicated for KiwiSavers to understand without legal advice. Further, scheme managers would have to go out and market the idea individually to accountholders. It seems unlikely managers would make the investment and participation rates would be minimal and skewed toward wealthier savers. To make a meaningful impact on allocations across the board the structure needs to be simple and requires a legislative nudge of the kind we propose. Effectively we are advocating a legislative path to create a simple opt out.

24 of 27

Creating World Class Portfolios for KiwiSavers

Is your proposal derived from overseas models? No. We have not done exhaustive research on other jurisdictions but we do not think there is a direct precedent for what we propose. We are proposing a New Zealand specific solution for a New Zealand specific scheme. Some Australian defined contribution schemes offer exposure to illiquid asset classes through some form of unitized investment product. In our view this is a complicated and expensive solution that ultimately does not provide an investment of the same type as would be possible under our proposed structure. The US 401(k) and other individual retirement accounts do not to our knowledge prohibit illiquid assets but because they are self-directed individual accounts (not centrally invested by a manager), from a practical perspective they have no way to access the kinds of illiquid assets our proposed structure envisages. We understand Singapore has a multiple account structure where a certain percentage goes into a savings account that is readily available for a number of life event purposes and where a smaller percentage goes into a capital account, available only on retirement. This has some similarities to what we are proposing except that we are not proposing that the split between locked-in and available savings be a mandatory feature or fixed percentage. Our proposal provides for a voluntary bifurcation and saver selection based on what is being offered by managers. We have not researched whether (and if so, how) the Singaporean capital account can be invested in illiquid assets.

25 of 27

Creating World Class Portfolios for KiwiSavers

EXHIBIT 5:

KiwiSaver stakeholders
This list sets out some of the important stakeholders in KiwiSaver as we see them. In the course of writing this paper, we have talked with many of the people identified here.

New Zealand Government Ministries and Agencies Office of the Prime Minister Rt. Hon John Key, Prime Minister Wayne Eagleson Office of the Minister of Finance Hon. Bill English, Minister of Finance Office of the Minister of Economic Development Hon. Steven Joyce Office of the Minister of Revenue Hon. Peter Dunne Commission for Financial Literacy and Retirement Income Diana Crossan Financial Markets Authority Sean Hughes Mark Verbiest Inland Revenue Department Bob Russell Struan Little Ministry of Economic Development Bryan Chapple Jason La Vaillant Michael Shaffrey New Zealand Trade & Enterprise Richard Laverty New Zealand Venture Investment Fund Franceska Banga Aaron Tregaskis Reserve Bank of New Zealand

New Zealand Treasury David Law Lisa Meehan Grant Scobie

Non-Governmental Organisations AMP Haumi Management Craig Stobo Cameron Partners Rob Cameron (Capital Markets Development Taskforce) Murdo Beattie Crengle, Sheves, Ratner Peter Ratner Eriksen Global Jonathan Eriksen Franks & Ogilvie Stephen Franks Institute of Financial Professionals David Green Deepak Gupta, Trustees Executors Ltd Investment Savings and Insurance Association Sean Carroll Landfall Strategy Group (Singapore) David Skilling New Zealand Institute Rick Boven New Zealand Institute of Chartered Accountants

26 of 27

Creating World Class Portfolios for KiwiSavers

New Zealand Law Society New Zealand Venture Capital Association Kerry McIntosh Colin McKinnon NZX New Zealand Stock Exchange Mark Weldon/Tim Bennett Securities Industry Association Society of Independent Financial Advisers Trustee Corporations Association University of Auckland Retirement Policy & Research Centre Michael Littlewood Workplace Savings New Zealand David Ireland Bruce Kerr KiwiSaver Scheme Managers AMP Peter Verhaart David Wallace

Gareth Morgan Investments Gareth Morgan Catherine Magiannis Mercer Martin Lewington Phil Graham Milford Asset Management Anthony Quirk Tower Sam Stubbs Richard Stubbs Tyndall Investments Peter Lynn Westpac Paul Richardson David McLean

Other Stakeholders Direct Capital Ross George Bill Kermode H.R.L. Morrison & Co. Tim Brown Movac Phil McCaw Pencarrow Capital Nigel Bingham Pioneer Capital Randal Barrett Matthew Houtman

ANZ Onepath Stuart Miller ASB Bank Ainsley Mclaren (Colonial First State) Brian Garrity Brook Asset Management Mark Ryland Fisher Funds Carmel Fisher Frank Jasper

27 of 27