KiwiSaver

There remains no real incentive for clients to direct extra contributions into KiwiSaver, so long as New Zealand is still a global outlier in its choice of tax structure around retirement savings, according to one financial advisory firm leader.

There remains no real incentive for clients to direct extra contributions into KiwiSaver, so long as New Zealand is still a global outlier in its choice of tax structure around retirement savings, according to one financial advisory firm leader.

With the government in the early stages of considering what the future of KiwiSaver looks like, and whether that means higher minimum contribution rates, tax seems to be the elephant in the room few are talking about, says Become Wealth Chief Executive Joseph Darby.

“When you're at peak earning capacity, you're getting taxed at 33% and 39% and then the investment returns are getting hammered, that's the 28%, so you're kind of stunting the growth.”

“I think that’s a bit of travesty in some ways.” 

New Zealand’s TTE (Taxed, Taxed, Exempt) structure around KiwiSaver, where contributions are pulled from taxed income, investment earnings are taxed, and withdrawals at retirement are generally tax-free, differs from the likes of the UK, US, Canada and to a large degree, Australia, where retirement savings are EET (Exempt, Exempt, Taxed) or at least have significant tax advantages.

Joseph Darby says KiwiSaver needs an overhaul, and as part of the process, the government should consider reversing the tax structure to make it more comparable with the international standard.

“I mean, what's the tax benefit? $521 a year? Most people, over a lifetime, that's going to add up to nothing. It's not going to make any material difference.”

The lack of a tax-exempt threshold for contributions has an effect on the nature of advice the firm offers clients.

“If you won a million bucks today, would you put it in KiwiSaver? No, because it’s illiquid and you don’t get a decent premium for that illiquidity.”

“In other countries, you see a financial advisor, they'll always say, you max out your retirement accounts first and then start looking at something else, whereas we'll just say, look at, in most cases, somewhere else that's actually liquid that you can get if you want to start a business or, buy another property, or buy a bach, or do something else when life changes.”

As KiwiSaver balances continue to swell the scheme is becoming a cash cow for investment managers, prompting one industry observer to question why there is not more downward pressure on fees.

As KiwiSaver balances continue to swell the scheme is becoming a cash cow for investment managers, prompting one industry observer to question why there is not more downward pressure on fees.

“Some of these managers are generating $100 million in fee revenue now, but we haven't really seen fees go down to what you'd expect in a much larger market like Australia or the US, with that sort of revenue stream,” says Paul Brownsey, who co-founded Pathfinder alongside John Berry and was its CIO before leaving the company a year ago.

The December quarter Morningstar KiwiSaver survey, released in February, offers the latest estimates of providers’ annual fee revenue although the research house warns against relying on the numbers as proof of how much money a particular fund manager is making from KiwiSaver. However, Morningstar calculates that the five largest KiwiSaver providers, ANZ, ASB, Fisher, Westpac and Milford will collect more than $650 million in fees in 2025 from KiwiSaver members, at an average fee of around 0.80 of a cent per dollar invested.

“There's a massive discrepancy between the lowest fee KiwiSaver operators and the highest fee KiwiSaver operators,” says Brownsey.

“So the obvious question to ask is, does it make sense for investors to pay higher fees to anyone?

“The answer is quite nuanced, but what people need to do is look at not just the headline fee, but also at the returns after fees are taken out.”

Brownsey says with almost guaranteed 6% funds growth each year from contributions alone, and the fact members tend to stick with their provider, KiwiSaver has become a dream for fund managers.

Pressure to reduce fees has previously been driven by the FMA, he says, but the regulator seems to have pulled back.

“There should be more pressure on fees, especially for those KiwiSaver providers who have scale. 

“They don't have to add people to their team, because they've already got critical mass. I mean, it's just a layup, really.” 

Paul Brownsey says some KiwiSaver providers do a better job than others of justifying their fees, but it is something every provider needs to consider. Prescribed disclosure requirements around fees means providers are all offering the same or similar explanations.

“Just because it's there doesn't mean it's easy for people to understand or get their heads around.

“It would be great to see research on the returns for the different KiwiSaver managers after fees,” says Paul Brownsey.

With confidence in KiwiSaver underpinned by members’ ability to switch funds types and providers at a drop of hat, just how that will marry with long-term investment in potentially illiquid private assets remains in question.

Financial services sector participants are weighing up the pros and cons of tweaks to regulation which could potentially pave the way for more KiwiSaver investment in private assets like unlisted infrastructure or private businesses, with the government now considering submissions on a range of options.

One of those would allow KiwiSaver providers to opt out of "portability" requirements for funds so long as their intentions are clearly laid out in the provider’s PDS. Providers could then use liquidity management tools such as side-pocketing or redemption gates and withdrawal limits to allow for investment of funds in private assets which generally have longer horizons of 5-10 years.

“The trade-off here is that by essentially locking-up assets, either through what they call side-pocketing or redemption gates, by allowing that, you're eroding the simplicity of KiwiSaver and potentially risking a little bit of loss of public confidence,” says Buddle Findlay Senior Associate Andrew Suggate, who specialises in financial services law.

“The ability to take it out, to buy a home, if it's your first home, or to transfer it to another fund you like better, that makes people feel like they've still got control over it.

“I think they just need to exercise caution on anything that's going to restrict that and maybe affect the public perception of KiwiSaver. And maybe people would accept it and think, ‘oh, that sounds perfectly fine’, but maybe not, it's a bit of an unknown.”

Members need to know what they are getting into

An alternative being floated and met with some support, is to allow for a specific private asset fund type within a KiwiSaver scheme, which would need to be clearly labelled with what its selection means for members’ ability to withdraw or move their funds around. Although liquidity management tools such as side-pocketing and redemption gates would also be opt-in for members, a specific fund type would make it clear if anywhere between 2-20% of their funds would be locked-up in a long-term investment.

Looking at the success of super private asset funds in Australia, Simplicity Chief Economist Shamubeel Eaqub says it is something New Zealand must seriously consider.

“We don't really have an infrastructure asset class, so I'd like us to have the choice for people to invest in.

“As for who should and who shouldn’t invest and how much they should invest in this asset class, I can't answer that, because I think that is quite personal.

“I imagine over the coming decades, we're going to see a significant shift in how much mix and match goes into people's KiwiSavers.”

In a joint legal opinion on the options, MinterEllisonRuddWatts and Chapman Tripp outlined concern for the need for transparency where members are committing their funds to be locked up for a longer period with potentially higher returns. Although the firms note the concept shouldn’t be too difficult to explain given the familiarity people have with offers like long term and on call deposits.

Andrew Suggate, of Buddle Findlay, agrees education and advice will be key to members’ understanding.

“Given the kind of quite well publicized low levels of financial literacy in New Zealand, are they really going to understand in advance that potentially a percentage of their funds is going to be locked up in a side pocket or is not going to be available when they want it?”

The latest Morningstar KiwiSaver report shows the largest provider, ANZ with $22 billion under management, continues to be outperformed by most other providers in the core diversified fund categories.

The report ranks ANZ multi-sector funds’ performance last or second to last place in conservative, balanced and growth categories for both the December quarter as well as the 2024 year, although returns were all in positive territory. Over longer time periods, ANZ does perform better compared to peers in the moderate fund category, ranking middle of the pack for the 10-year period.

At the top performing end, Quay Street features in first and second across a range of time periods for conservative and balanced funds. Milford continues to deliver consistently high performance over the long term, although returns in the short to medium have suffered of late. Generate is ranked in the top five for a range of time periods and across different fund categories.

Of the default funds, BNZ, Booster, Superlife and Simplicity lead the table for the three-year time period, followed by Fisher Funds and Westpac.

The average diversified funds category returns for the quarter had a range of 1% for conservative to a strong 5% for aggressive growth assets, with Morningstar reporting annual returns followed a similar trend.

Growth in funds invested continues unabated

KiwiSaver assets grew to $121.9 billion in the December quarter, up close to $24 billion for the 2024 year. 

ANZ remains in the lead for market share with $22 billion under management, while ASB is in second position, with a market share of 15.0%. Fisher Funds, Westpac, then Milford make up the top five.

“The five largest KiwiSaver providers account for approximately 66% of assets in our database, or around $81 billion under management,” says the report.

“We estimate these five providers will deduct more than $650 million dollars in fees in 2025 from KiwiSaver members, at an average fee of around 0.80 of a cent per dollar invested.

“This mirrors the overall market fee levels in terms of average dollar invested.”

Murky economic waters

Taking a bird’s eye view of economic conditions, Morningstar describes the final quarter of 2024 as a mixed bag for the economy.

“While some indicators pointed towards a potential upswing, others suggested continued headwinds,” says the report.

“Globally, economic uncertainty persisted, with geopolitical tensions and varying growth trajectories across major economies.”