KiwiSaver

The finance industry says it is improving the KiwiSaver system but it is a work in progress.

A report by  Consumer NZ found New Zealanders preferred non-bank providers such as Simplicity and Milford ahead of the schemes offered by most New Zealand banks.

The report suggested people’s attitudes were soured by a market-led subsidence of KiwiSaver values. 

But there were other concerns, separate from market fluctuations, such as a lack of transparency about fund performance and the fees people pay.

“Three out of four KiwiSavers didn’t know what they paid in fees while 60% didn’t know how well their fund was doing compared with others on the market,” Consumer NZ wrote.
The chief executive of the Financial Services Council (FSC) Richard Klipin welcomed surveys and reports on KiwiSaver for “shining a light” on the industry.

But he defended his members against criticism.

“KiwiSaver companies are working really hard to serve their clients in really tough times …. and the Consumer NZ report provides an insight into some of the opportunities available to continually lift the bar.”

Klipin said both consumers and product providers were on an evolutionary journey and that would continue.

“I do think there is an underlying issue with financial capability in New Zealand, that we all have a responsibility to address, and that is to help New Zealanders be better with money.”

So, did the Consumer NZ report suggest the industry not done well enough up til now?

“I think it is a work in progress.”

A significant minority of people are making voluntary contributions to their KiwiSaver schemes to take advantage of volatile market conditions, according to research by ASB.

While most people do not pay extra, a total of 29% are paying more than they have to, said ASB senior economist Chris Tennent-Brown.

The news of people paying extra gives a boost to the standing of KiwiSaver, since it follows other research that finds overall balances are lower than they could be because other people are taking contribution holidays during difficult times.

The research could be good news for mortgage advisers whose first-time customers often use their KiwiSaver account for a deposit on a house.

Tennent-Brown said many people were sticking with existing KiwiSaver strategies, which could give them the chance to maximise long-term gains.

“Over the last few volatile months, the number of people switching has remained at normal levels,” Tennant-Brown said.

“This is really pleasing to see and it contrasts with the spike in switching that we saw in the early days of the pandemic in 2020.

“One of the questions I get asked is when markets are volatile, should people stop making contributions and the answer to that is generally no.

“People should continue their regular savings if they can. Furthermore, when markets are down, making lump sum contributions and buying when investment values are low will benefit overall savings when markets recover.”

Tennant-Brown said 29% of people had made additional voluntary contributions to their KiwiSaver, and more than a quarter of those were motivated by a desire to use their scheme to get better returns from the market.

“Whatever the reason, it is good to see people maximising some of the key benefits of KiwiSaver. It is going to help them reach their savings goals and it’s a smart financial thing to do, which is great.”

What's value for money with KiwiSaver? Former Financial Markets Authority chief executive Rob Everett provides answers in this Good Returns TV interview.  [Including Podcast]

Rob Everett admits working out what is value for money “is a difficult topic.”

“What we were trying to do with value for money is acknowledge that it's not all about fees.”

He says, despite claims from the industry, that the FMA isn’t trying to drive every KiwiSaver provider to a low cost, passive index hugging model.

That would be a poor result for the industry and members.

See Podcast below

“We were also trying to acknowledge that for a lot of people, the difference between 50 basis points and 60 basis points or 75 basis points, it's not registering in their decision making.

“A whole bunch of other things are registering in their decision making, and sometimes it's been a challenge to work out what.”

Everett says increasingly, it's about what funds are invested in, what disclosures they provide members, the data the schemes give members and transparency.

“Value for money is partly about fees and returns. But…not all investors by any stretch of the imagination.”

He says at the moment the driving force is climate change and ESG factors, so now the FMA is worrying about greenwashing.

“Value for money was an attempt to say, we're frustrated about fees, and so we are going to push hard on fees, but it's not only about fees. And your value for money may be different from mine.”

While the FMA can’t regulate KiwiSaver fees, Everett would be wary going down that path.

“I'd be wary because I don't know we'd be any better at setting fees than anybody else. And actually setting fees, I think, is a slightly dangerous place to be.

The FMA has not pushed to get powers to regulate fees.

“What we've done instead is make a lot of noise. We're not quite sure what level the fees should be, but we're pretty sure they should be lower than where they are.

“And actually, the government took the same approach during the default provider review, so there was some commonality of view there.

“It's frustrating sometimes to push at something where you actually don't have the ability to say exactly what you think good looks like, but we have seen fees start to move. So I think the noise has had some impact at least.”

Everett says since the FMA started making noises some schemes had abandoning administration fee or lowered management fees.

“We have seen movements down by some of the bigger players. So, I think we've had an impact, but so have the low cost providers.”

Everett: says the FMA’s view is that every fund does not have to have the same fee, “or that even every fund has to have a low fee.”

Where a fund is charging a higher fee it needs to explain why.

“Some of the better performing funds after fees, have been reasonably expensive. So, we're not saying you can't charge high fees, but what we're saying is, if you've got a passive low cost that's got an index hugging approach, and you're not delivering spectacular returns, why are your fees at the top end of the range? And maybe there's a good reason.

Everett questions whether banks should have been able to get away with th big KiwiSaver land grab in the early days of the scheme’s launch.

He says” I don't know at the time that it was right, but one of the impacts of leaving it there for so long was that you built up these enormous balances of funds under management and collections of customers in the big organisations that didn't seem sufficiently incentivised to be creative and innovative.”

“I do think when the government did its default provider review, they seemed to have been looking for a better balance between small and more innovative players and the bigger players that have the resource.

“I suspect at the time, I may be wrong, there was a sense these players have the experience and the resource and the technology to get this thing off the ground.

“I think it's a shame given the markets we've been in. It took such a long period before it actually got recast a bit. But I think it's in a more balanced shape now, I would say, at least at the default provider level.

Pathfinder executives say KiwiSaver managers must do more to prove their ethical investment policies and products are making the difference they say they are.

In what is understood to be a first for KiwiSaver management firms, Pathfinder KiwiSaver has released a detailed Sustainability Report that shows investors how and why it makes sure its investments hit ESG (Environmental, Social and Governance) targets and is encouraging other managers to step up disclosure around how they invest ethically or responsibly.

"Promises of no fossil fuels, renewable energy investment and emission reductions need to be matched with easy-to-understand reporting," says Pathfinder chief executive John Berry.

“KiwiSaver managers disclose financial returns from their investments. Now KiwiSaver managers, especially those claiming ethical or responsible credentials, need to also disclose non-financial metrics.”

Berry says good ethics are critical to financial success and investors and investment companies all have a role to play to "…help fund the lasting transformation to a more ethical world".

"At Pathfinder we are on a mission to raise awareness that the impact of how we invest our dollar is as impactful as how we spend our dollar or spend our time."

He says the report details how Pathfinder decides what it means by ethical investment and how it applies this framework to its investment decisions.

It also shows Pathfinder's voting and engagement activities as a shareholder and the results of its social enterprise model where it provides long-term and passive income for 18 Kiwi charities.

Pathfinder’s chief investment officer Paul Brownsey says investors have a right to know what the carbon footprint of a KiwiSaver investment is along with the extent of its renewable energy exposure and the company's voting record.

"It’s not enough to say you’re avoiding investment in tobacco, gambling, weapons and other harmful activities. The bigger question is, after avoiding the negative, where do you invest to generate positive benefits?”

He says the impact of Covid-19 on sharemarkets has been extraordinary and has hurt families and economies around the world.

"Our strong ethical policy has been tested but has ultimately proved very resilient.

"It is also an effective risk management tool. Measuring the way a company behaves, and how clearly it thinks about Environmental, Social and Governance issues is another dimension of risk management – some of these risks are not captured by traditional accounting metrics."

The report also covers Pathfinder's concerns regarding climate change and how it plans to improve its work in that sector.

"Climate change is a clear danger to the future of society, and companies that invest in long term projects dependent upon fossil fuel are not thinking clearly about risk.

"Other industries we avoid include airlines, cruise ships, gambling, etcetera – all sectors that suffered tremendously as the world went through lockdowns."

Pathfinder's position:

• to avoid animal testing and factory farming
• to not invest in an NZX company without at least one female board member
• have no tolerance for companies with exploitative behaviour in supply chains
• to invest in no companies involved in the exploration, extraction and distribution of fossil fuels
• to invest in no companies that mine or use thermal coal (this includes utilities that generate 5% or more electricity from this source)
• avoid companies with revenue (at a 5% threshold) from adult entertainment, alcohol, or gambling

Brownsey says four of Pathfinder's funds are carbon negative and this year will be extending this to more of its funds.

"We are investing more in systems to measure more company risks around the environmental, social and governance behaviour of the companies we invest in…it is blindingly obvious that companies that manage these risks are likely to be better-managed companies with better than average prospects."

"We encourage you to consider the kind of world you want, because collectively as investors, we can have incredible influence," says Berry.

"Over time we want to go deeper with measuring and reporting what we do and the difference we make through investing and engaging."

Key statistics from Pathfinder’s Sustainability Report:

 Its KiwiSaver portfolio has 65% less carbon emitted than a key global equity market index.
 Pathfinder’s KiwiSaver has 3.7 times the exposure to renewable energy and 13 times the exposure to electric vehicles compared to the key global equity market index.
 In the year to 31 March 2021 Pathfinder KiwiSaver voted as a shareholder nearly 5,000 times, and of these 282 votes were against the recommendations of management of the company invested in.
 It has no fossil fuel exposure and its KiwiSaver is invested in only two of the top 20 banks that lend to fossil fuel companies and is committed to divesting these during the current financial year.
 Pathfinder tracks the number of companies it invests in that have emissions reductions targets.