KiwiSaver

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“It is noted that borrowers’ KiwiSaver funds may be withdrawn if the individual can provide evidence that they are suffering significant financial hardship, including inability to meet minimum living expenses,” the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

 

Fund managers have a tough job claming that their returns justify higher fees, researchers say.

Members of AUT’s Auckland Centre for Financial Research took issue with comments from ANZ in relation to its recent white paper and survey.

It said that young people in particular were putting too much of a focus on fees, sometimes to the detriment of returns.

“Choosing a fund solely on fees means members may miss out on greater returns and a larger balance in the long term,” ANZ said.

But Ayesha Scott, a finance lecturer at AUT, said that was potentially misleading.

She said the long-term performance of most managed funds within the same risk category tended to be “roughly the same”.  “They all perform in a very similar way.”

That made fees more important, she said. “Think of it as fixed cost versus variable return.. in almost all cases you’re better off long-term choosing a lower fee structure.”

She said fees would vary according to the providers’ fee structures. An online provider would have lower costs than a large-scale one with offices across the country.

“Whether you’re getting much in terms of return for fees is debatable. Some offer more in the way of service.”

It comes as new research released at the Financial Services Council’s conference shows support for increasing KiwiSaver contributions.

Almost 70% of those surveyed supported increasing employer and employee contributions from 3% to 4% by 2021.

“After ten years of KiwiSaver we are maturing in our understanding and appreciation of the scheme. Given the universal support this research shows we now need to have a constructive policy debate on contribution levels and how we can increase them in a sustainable manner,” said Richard Klipin, chief executive of the Financial Services Council.

“With support for strengthening KiwiSaver so high there is a clear challenge for our political leaders two weeks out from the election to show their roadmap for backing what voters want and growing KiwiSaver.

“It is important that these findings are given serious consideration at policy level.”

He said there was widespread support for KiwiSaver members being able to choose automatic increases in contribution rates, and to have extra choices in what they contributed. Most also wanted people over 65 to be able to join.

When is a ‘balanced’ fund not a balanced fund? When it takes the risk of a growth fund, one researcher says.

AUT professor of finance Bart Frijns wrote a research paper in which he said the way KiwiSaver funds’ risk levels were described could be misleading.

“When you look at the risk profile of a ‘balanced’ fund, there was a very large dispersion in the risk profile that those funds have. Some balanced funds turned out to be more risky than growth funds,” he said.

“This different level of risk exposure by funds indicates that in the long-run investors in such funds could end up with significant differences in the values of their final portfolio endowment.”

He said it required more transparency from KiwiSaver providers.

When a fund said it was a particular style of investment, investors needed to be able to look at the risk profile and see how it could be expected to perform. 

“Some detailed classification or risk scale would be really helpful for people. There are very easy ways to measure these things. But it’s something a normal investor doesn’t readily understand. Some standards need to be set.”

Providers are now required to use risk indicators in their reporting to clients but these have been criticised because they are based on volatility experienced over the previous five years.

Tim Murphy, Morningstar director of manager research, said his firm categorised funds according to their asset allocation, not what they were called.

But he said it was not common for funds to end up in a different category.

Nikko, ANZ, Booster and OneAnswer all have balanced or balanced growth funds that end up in Morningstar’s growth category.

Booster, Generate, Fisher Funds, Kiwi Wealth and Mercer all have growth funds that Morningstar categorises as aggressive.

“It’s a bigger issue in Australia,” Murphy said.

He said Morningstar would consider a growth fund one that had between 60% and 80% growth assets. But over time a 60% growth fund would be expected to have a different outcome to an 80% one.

David Boyle, group manager of investor education at the Commission for Financial Capability, said it was a function of New Zealand having a smaller investment market.

“There is a challenge around making sure everyone is true to label. Part of that is because of the number of funds in the market.”

It should be expected that would change over time, he said. “It’s worth noting and being aware of.”

Richard James, chief executive of NZ Funds, said he did not see an issue. “The rules around fund names and descriptors and the risk indicators are pretty robust.”