Huljich case brings push for reforms

IT'S TIME to end the two-tier KiwiSaver market and require all providers to operate under the same high standards as the default providers, says Jack Regan, AMP Financial Services New Zealand managing director.

Regan says a two-tier KiwiSaver market is operating with the six default providers – AMP, ASB, Axa, Mercer, ING and Tower – operating to much higher standards of disclosure and governance than schemes like Huljich, the subject of regulatory probes over its reporting standards.

The blunt Australian said: "People think all KiwiSaver schemes are one and the same in terms of prudential, regulatory and reporting requirements. That's just not the case.

"There are different standards in relation to default providers and non-default providers."

Had Huljich been a default provider, Regan said, he would have been unable to keep his performance-adjusting related-party transactions secret.

But given that all KiwiSaver providers were the recipients and stewards of large amounts of government contributions, Regan said, "all KiwiSaver providers should adopt the same standards".

The easiest way to do that would be to simply extend the obligations of the default providers to all KiwiSaver schemes, no matter how small.

If they could not cope with them, they should not be in the business, or they should hire someone such as Aon to administer their scheme for them.

A spokesman for Commerce Minister Simon Power said: "The minister has nothing to add to the issue of KiwiSaver integrity at the moment, nor will he be making specific comment on the Huljich funds issue while the Securities Commission is making inquiries."

The Huljich affair has plunged the funds industry into a debate on how to improve the integrity of KiwiSaver and rebuild public trust in the performance figures and rankings of funds.

Some, such as fund manager Peter McCaffrey, from Annuitas, which advises the Government Superannuation Fund, believes all fund managers, including those offering KiwiSaver schemes, should adopt international fund reporting standards known as GIPS (Global Investment Performance Standards), which require rigorous auditing to create an environment where no fund manager can manipulate them. Huljich's "compensation" payments would have been recorded as a cash inflow under GIPS, rather than an investment gain, and so would not have boosted performance, McCaffrey said.

"GIPS would give people the confidence the returns were all produced on a consistent basis and the things that Huljich was doing would not have been in there," he said.

GIPS has been embraced by fund managers overseas, said McCaffrey, but it has doubters here. Peter Lynn, from Tyndall Investment Management, said GIPS would add a lot of cost and wouldn't make much of a discernible difference to performance numbers.

He said all KiwiSaver providers should be required to supply portfolio information to a central authority, which could check the data and calculate returns on a like-for-like basis once a month. "The industry is corrupt," he said. "It is a dishonest industry and I don't think enough people in the regulatory authorities understand the issues."

Chamberlain attacked the fund research agencies, such as Morningstar and FundSource, for not scrutinising the data the fund managers provided them. "They take it all on trust."

It does seem the ratings agencies are no longer 100% certain about the information they are getting from fund managers, and there may be more performance-boosting practices to deal with before investors can be sure the KiwiSaver fund rankings accurately reflect the managers' performance.

Chris Douglas, co-head of fund research at Morningstar, said there were fears that the KiwiSaver performance rankings had been skewed by some fund managers waiving fees. "It could have a big impact. It could make 80 basis points of difference, or even 1%."

From one point of view, waiving fees appears benign, as investors get a direct benefit, said Douglas, but they could complain that it provided a performance booster that would not be continued.

Returns reported in the Huljich KiwiSaver prospectus are measured before deducting registry fees – a figure of $222,731 in the year to March 2009. Peter Huljich declined to answer questions on the effect of fee deductions on returns.

Morningstar said it would "put more emphasis" on performance-distorting fee waivers in future, and might start flagging funds where fee waivers had provided a performance kicker.

- © Fairfax NZ News