KiwiSaver 'bailout' complied with rules: Westpac

Westpac says a controversial investment in “pick or pay” notes issued against life insurance policies ticked all the usual boxes, however the scheme's promoter has complained to the FMA over the bank's actions.

Thursday, August 1st 2013, 6:59AM

by Susan Edmunds

In 2011, BT Funds Management invested KiwiSaver funds in Te Rau Aroha Longevity Trust (TRAL) notes to the value of $8.75 million, with a term of 10 years. The notes had a face value of $12 million.

They were designed to provide an income as people whose lives were insured died. The resulting payouts would also fund ongoing premiums. But the scheme hit trouble when that did not happen as quickly as expected and more investment was needed. It is believed that the policies were with AIA.

Instead of providing the cash injection the scheme’s designer says was promised, BT spent $13.2 million buying the bonds out of its Kiwisaver scheme – a move that some are comparing to the bailout Huljich was fined over.

A Westpac spokesman said appropriate processes were followed, disclosures were made and no investors in the fund or any other BT managed fund suffered any loss.

But the scheme’s designer, Cameron Smith, has complained to the Financial Markets Authority saying that BT knew the investment would soon have no value when it bought it from the KiwiSaver scheme.

Spokesman Tony Reid confirmed that the complaint had been received but could not say how soon the FMA would say what – if any – action was to be taken.

Smith said BT agreed in June 2012 that it would contribute another $5.5 million to provide cashflow to keep the scheme going until payouts made it viable. Although the notes were “pick or pay”, BT was keen for the 10%pa coupon rate to be paid out at every opportunity, even when it was not affordable, Smith said.

In July last year, concerns were raised about the margin between claims and premium being too small and the possibility that the notes would not be repaid within 10 years. TRAL then changed the mortality assumptions that had been used to value the policy, which reduced the security value.

BT made a payment of $3.25 million and said the rest of the $5.5 million would come when the TRAL audited accounts were completed. These were supplied but BT did not subscribe for the additional $2.25 million of notes. Smith said: “By not subscribing for the full amount, BT was well aware that the policies would lapse, and as a consequence, the investment would have nil security value and the notes would not be repaid.”

Over the next few months, Smith says BT made it clear that it wanted to exit its position and would take up to $9 million. But then BT sold the funds to itself for $13.2 million, a figure decided on by a specialist third-party pricing provider. Smith said: “It is difficult to understand how any reputable and totally independent pricing provider could possibly arrive at a value approaching $13.2 million if all the information had been properly disclosed.”

He said BT seemed to want to transfer the asset out of its KiwiSaver portfolio quickly because auditors were going to note it in the March 2012 accounts. In October 2012, the policies lapsed because the premiums were not being paid.

Westpac would not provide Good Returns with a copy of the provider’s valuation. A spokesman said the bank had no other comment to make and would not respond to questions including whether there were any matters associated with the transaction that might have caused any of the funds to be withdrawn from the market had the notes not been transferred to a related party.

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