Best Practice: The Trust Deed Checklist

Name	Transparency Test - No Unitisation	Consumer Control Test - Reserving Not Allowed	Consumer Protection Test - Trustee independent of Manager	True Costs Test - Unable to add on unquantified ordinary expenses of the Manager	Provider Sanitation Test - Not allowed to deal with any related parties not listed in trust deed	Prudential Test - Consumer prohibited from investing totally in non-diversified fund	Consumer Sovereignty Test - trustee has final discretion
AMP
ANZ
ASB
AXA
AON
National Bank
Tower
ING (SIL)
GMK
Westpac
Staples Rodway	1
Superlife
Mercer				2
Grosvenor
First New Zealand Capital
Fisher Funds Growth
Fidelity
ABN AMRO	1
IRIS	1				3
Credit Union				2

Note: Prepared by Gareth Morgan KiwiSaver Limited and independently verified by legal advisors.

1. Without a clear statement in this scheme’s documents that they do not unitise, we have assumed that the scheme does unitise.
2. Without a clear statement in this scheme’s documents defining the manager‘s ordinary expenses or fees (such as performance fees), we have assumed that the manager fails the True Cost Test.
3. Without a clear statement in this scheme’s documents that they may not undertake related party transactions, we have assumed that the scheme may.

At Gareth Morgan KiwSaver our primary concern is to ensure the public interest comes first. This is how we’ve been doing it:

• We’ve toured the country informing the public of the problems with the long term savings industry internationally
• Lobbied the government to move from rules-based regulation to principles-based regulation, where miscreants who put their commercial interests ahead of those of their clients, can get sent to jail
• Published on our site the work of Eliot Spitzer, the New York Attorney General who has imposed fines upon the endemic wrongdoing by some of the world’s largest financial firms
• Designed a KiwiSaver scheme that is transparent, does not pay commissions, and as much as we have been able excludes the devices that over time lead to savers being separated from their money – reserving, unitisation, dealing with related parties, unlimited expense add-ons.

Kiwi savers need to be concerned about the safety of their funds over what is likely to be many years of investment. The long-term savings industry does not have a good track record of delivering satisfactory returns over 10, 20, and 30 year periods. Indeed typically only 30% of funds manage to meet market average returns in any one year, so the chances of the same fund generating market average or higher returns over several consecutive years is quite low.

The reasons for this poor relative performance include

• high fees
• high expenses
• errors in pricing of units
• reserving practices separating savers from their money
• a lack of accountability of the guardian to their saver-clients.

We have a number of features which we regard as essential bottom-line safety features that KiwiSaver providers should include in their products, simply as “best practice”, and as well there are a couple of design flaws in the KiwiSaver regulatory environment that we should all be aware of. They are:

• Transparency - Does the Scheme avoid unitisation? The industry norm is to create units from the funds they collect and then calculate the unit price at any time by simply dividing the market value of all the cash plus any securities that have been bought by the number of units on issue. It’s fine in theory but this practice prevents you checking that the company is valuing your units correctly. Internationally there have been an unfortunate succession of cases brought showing mis-pricing of units in favour of the company. In New Zealand our Securities Commission has never even enquired. We don’t like non-transparent practices such as unitisation.

• Consumer Control – Does the Scheme prohibit reserving? It is common for funds to reserve monies for various purposes – anticipated tax or expense increase, to smooth returns and so on. Now the trouble with reserving is that the ownership of your portion of the reserves is less secure and you can end up losing that money – for example; if you leave the fund before those reserves are returned. It is an awful aspect of the long term savings industry that reserving is condoned so we suggest that if you want to future-proof your KiwiSaver savings, you only chose funds that do not do it. It wouldn’t take much lobbying from the sector to see the current reserving provisions once again widened to align with accepted but totally unfair market practices.

• Consumer Protection – Is the Trustee Independent? The trustee should be independent of the investment manager. Some investment managers have promoted schemes where they have a subsidiary or related party that is the trustee. Of course all the assurances are there that things are at “arms length”. Consumers should not accept this as an adequate level of protection – you don’t need to, so don’t.

• What are the true costs – are expenses added? It is common for fees and expenses to soak up 60% of the returns made on savers‘ money. We view this as unacceptable and so urge you to ensure total charges aren’t too high. One of the awful tricks pulled is to quote you a low-ball fee and then add-on unquantified expenses. It is a very poor practice.

• Provider Sanitation Test – are deals with related parties permitted? Unfortunately one way providers in the long-term savings industry extract more than their fair share of charges from the unsuspecting public, is to contract related parties to provide services. These are categorised as “expenses” and accumulate outside the fees declared and quantified to you. Again they will claim the charge rates are commercial and “reasonable” but in law the onus is on you to take them to court to establish they are “unreasonable” – a costly way to prove your point. We urge you to ensure your provider declares they will not deal with related parties apart from those fully disclosed in the trust deed.

• Prudential Management – is the fund diversified? KiwiSaver providers are looking after people’s long-term savings. The Government should have insisted that all providers offer only adequately diversified funds appropriate for the protection of wealth. It has been lazy in that regard. We are seeing providers offering specialist funds that people can put 100% of their KiwiSaver funds into. We should never forget that in 1987 a prominent Small NZ Companies Fund lost 75% of its value. This is not a suitable product for all of someone’s long term savings to be tipped into.

• Consumer Sovereignty Test – is the Trustee or the Consumer the Boss? There is a flaw in the design of KiwiSaver schemes which the funds management industry will be happy about. These trusts are discretionary, and apart from what the rule-makers manage to pin down the trustee has absolute discretion. That is very dangerous for individual savers because the trustee looks after the scheme and not necessarily the interests of any particular member – and certainly not your interests as you depart that scheme. The government should have insisted on bare trusts being used where consumer sovereignty, not trustee sovereignty, rules.

• Rules-based regulatory oversight – fixing the weakness of NZ’s finance market. The Securities Commission and the government can give all the assurances they like but in the end a rules-based system leaves the door open for smart providers and their even smarter lawyers, to exploit weaknesses in the rules. The consumer will be the last to know. New Zealand should have a principles-based regulatory system where one of the statutory obligations is fairness to the consumer – the inability to make commercial gain at your customer’s expense except unlawfully. That’s the type of safety barrier we need.

Our trustee deed checklist gives you a ‘yes’ or ‘no’ to safety features of the schemes currently on the market. You be the judge.

If you want to join the Gareth Morgan KiwiSaver Scheme, start here.