KiwiSaver

KiwiSaver providers have been told they must do better, as the amount they earn in fees soars.

Financial Markets Authority chief executive Rob Everett says KiwiSaver has now reached the size where providers might be able to trim fees, but that is not happening, and providers must do more to engage their members.

The regulator has released its latest KiwiSaver report, which shows total assets were up $7 billion from $33.8b in 2016. Investment returns of $2.7b were more than double those of 2016, and are close to the previous record $3b, reported in 2015.

The average management fee per member was $97.82, up from $84.15 in 2016, reflecting an average balance of just under $15,000.

The average administration fee was $30.30. Investment management fees charged by providers rose 21.3% year-on-year from $219.5 million to $266.3 million.

Everett said if a service being provided or the returns were being generated that reflected an investment providers were making, the FMA might be more sanguine about rising fee revenue.

“But we are not sure we are seeing that, and the statistics on member engagement suggest not.”

The report showed low levels of engagement with members of default funds.

Providers are asked to report quarterly about how they engage with default members to encourage them to actively choose an investment and the number of members who took the opportunity to make that choice.

For four of the nine default KiwiSaver providers, the percentage making an active decision fell between 2016 and 2017. All reported fewer than 10% of default members making an active choice.

Everett said providers needed to put more focus on making sure people were “not just sat there”.

“We are getting somewhat impatient on that front,” Everett said.

He said he hoped the advice KiwiSaver members was getting was improving. The FMA has revised its guidance on KiwiSaver advice, in a move to try to make it easier for providers to offer information to their members. Some had reported that the guidance was getting the way of answering client questions.

He said some providers had reported immediately rewriting their training material and guidance for staff to enable them to be more helpful to members seeking information.

It has also partnered with KiwiSaver providers on field trials to see if behavioural insights could help them better connect with members.

Everett said the FMA was keen to ensure that when people transferred to a new provider, or joined for the first time, they were getting good information and guidance.

KiwiSaver being packaged up with other products was something the FMA was wary of, he said.

For the second year in a row, the number of transfers, 172,017, is higher than new members joining, 154,531.

Everett said: “We understand that engaging with default members can be difficult. But the lack of progress in this area by the default schemes is disappointing. Especially when the income from fees paid by default members has increased to $31.5 million, and providers still seem to have little trouble engaging other providers’ members to get them to transfer.

“We have written to the chief executive of each default provider, seeking their commitment to meet their obligations to their default members. At the very least, we expect them to deliver on what they said they would do in their tenders to the Government seeking default status. Or, if they have tried that and it didn’t work, to try something more effective.”

Everett said it had been a good year for KiwiSaver members, with strong market returns combined with Government and employer contributions boosting balances.

But he said people needed to realise it was a long-term investment and not make knee-jerk decisions if markets hit weakness.

KiwiSaver provider Simplicity has signed a deal with variable annuity firm Lifetime Retirement Income, to provide a new KiwiSaver fund that offers retirees an income for life.

It is launching the Simplicity Guaranteed Income Fund, which members can switch to as they approach retirement.

Then they receive 5% of their final KiwiSaver balance for life, from 65. Lifetime’s insurance product covers the longevity risk.

As with Lifetime’s other products, investors who start taking drawdowns later in life receive a higher percentage of their balances as annual income. When investments do not generate enough of a return, investors’ capital will be used to meet payments.

The fund will be invested with a balanced asset allocation.

Lifetime founder Ralph Stewart said it had always been intended that there would be wholesale and retail opportunities. The deal with Simplicity meant it was the only KiwiSaver provider who could offer the option, he said.

Simplicity’s is a simpler product than the standard Lifetime income product, with different capital protection mechanisms. It can only be used by an individual, whereas those who invest with Lifetime direct can take out an investment as a couple.

Simplicity founder Sam Stubbs said there was a lack of investment options for retirees. They were limited to low-interest rate term deposits or too-risky investments that offered higher returns.

“The payments are designed to ‘top up’ NZ Super, so retirees can meet their regular living expenses.”

Simplicity will charge $30 a year for the fund, plus 1.6% a year, which is lower than Lifetime’s standard fee. Stubbs said it should be expected to drop as the fund achieved economies of scale.

The fund is invested in a balanced portfolio of 3000 investments in 23 countries: 55% is invested in investment-grade bonds and 45% in local and international shares. Investments are managed by Simplicity as well as Vanguard.

Stubbs said a law change was needed to allow those over 65 to move to new KiwiSaver schemes, so that those who were already retired could take advantage of the new fund.

There should not be a need for finance companies to tap into borrowers’ KiwiSaver accounts when they default on a loan, one provider says.

The Commerce Commission has revealed that it has been told finance companies think they can access borrowers’ retirement savings if they fall behind on their loans.

In its latest Consumer Issues report, it said budget advisers had told the commission that some lenders, including finance companies, were considering KiwiSaver balances as a repayment source for consumer debt.

“It is noted that borrowers’ KiwiSaver funds may be withdrawn if the individual can provide evidence that they are suffering significant financial hardship, including inability to meet minimum living expenses,” the commission said.

But an AMP spokesman said it should not be necessary.

“There are already provisions for individual members to access KiwiSaver for the purposes of financial hardship and we would expect these to be satisfactory without any need for third parties to seek access to an individual member’s account, which is not contemplated in the design of the scheme as far as we can see.”

The Commerce Commission oversees the Credit Contracts and Consumer Finance Act, which governs responsible lending.

The commission had one complaint relating to a bank in the 2016/2017 year. Most complaints related to finance companies, payday lenders, car lenders and mobile traders.

Are KiwiSaver fees too high – or to fund managers deserve to be rewarded for offering something a bit extra?

The fees charged by fund managers, particularly in the KiwiSaver scheme, have been in the spotlight since ANZ released its whitepaper and survey to mark 10 years of the scheme.

In it, it said that there was a growing focus on fees, particularly among younger investors, and that could come at the expense of returns.

But that was criticised – AUT researcher Ayesha Scott said, over the long term, most managed funds performed in broadly the same way and the key differentiator for investors’ outcomes was the fees charged.

Adviser Brent Sheather said KiwiSaver schemes charged two or three times the average fee levied by US 401K schemes.

He said the Financial Markets Authority had been too reluctant to draw a line in the sand publicly for what it thinks a reasonable fee should be.

Switching from a KiwiSaver provider that charged 1.4% a year in fees to one that charged 0.4% would have the same effect as increasing contributions from 3% to 4%, he said.

Management fees can range up to about 1.3% a year and providers charge other fees on top of that, such as administration costs, which can add another $30 or $50.

“What we should be looking at is the extent to which the manager is reducing the extra return we get from shares over and above the return we could get in bonds as this captures the impact of fees on both return and risk. Mum and dad invest in shares on the basis that shares outperform bonds.”

Clayton Coplestone, of Heathcote Investment Partners, said fees were a red herring.

“In life, I find you get what you pay for. It’s not the fees that are the concern but what you’re getting for the fees.”

He said anyone who charged a fee, whether that was a fund manager or an adviser, needed to be clear about how they added value.

“If you’re going to do a cookie-cutter portfolio and not a lot of thought or IP has gone into that, the opportunity to put your hand out for a significant fee is zero to none… But if it’s something a bit unique or over and above, they deserve to be paid for that.”
Murray Harris, of Milford, agreed with ANZ that there had been more focus on fees.

“Without the right context or education for the end investor the focus on fees alone is dangerous. As the saying goes – cost is only an issue in the absence of value. If the client is getting value for the fees they are paying then there is no issue. That is true of anything they purchase,” he said.

“There is plenty of data from the likes of Mercer, Aon and MJW that shows NZ managers have added value after fees versus a passive approach. The issue with even a low-cost passive approach is you are always guaranteed to underperform the relevant benchmark because passive will deliver the benchmark return less the fees.“

Chris Douglas, of Morningstar, said he did not think there was too much focus on fees.

“We have seen fees come down from providers like ANZ over the past few years, and I would like to think the focus on fees has been one reason for that.

“For me the most important factor is ensuring you are in the right KiwiSaver scheme to meet your long-term objectives. That will have a big impact on your future returns.”