KiwiSaver

KiwiSaver has finally hit a speed bump shrinking for the first time to end the September quarter at $96.2 billion. That’s down around $2 billion from June.

This was entirely due to market movements and to be expected, says Morningstar data director of Asia-Pacific Greg Bunkall.

“As a growing product, inflows have overshadowed outflow and market movements but as KiwiSaver matures we can expect market movements to have more impact leading to more ups and downs in the overall KiwiSave balance. It’s normal and to be expected.”

Market maturity means providers need to start thinking about KiwiSaver as a traditional investment product with ups and downs in market movement and no longer in terms of guaranteed revenue growth, he says.

Recently there has been a significant increase in options and providers particularly with white label funds brought onto platforms such as InvestNow and KiwiWRAP and offered as KiwiSaver.

Bunkall until this point, New Zealand hadn't had the same level of proliferation as Australia, but the trend there is reversing with the number of super funds falling from 170 to about 120. ”Regulators are really trying to increase the scale at which the super funds operate. Australia Super, for instance, is a A$263 billion fund in assets and it anticipates to be at A$500bn at 2026. QSuper and SunSuper, which were about the same size were put together and are about the same size as AustraliaSuper with similar growth aspirations.”

Bunkall says Morningstar anticipates increased scale, heightened competition, larger member balances, passive investment strategies and regulatory pressures.

Drawing insights from what we can see overseas we would expect these trends to persist and continue downward pressure on fees.

Fees reduced but expensive funds grow

In KiwiSaver multi sector categories, about $310 million worth of fees were generated in 2016, more than doubling in the last six years to around $645m.

While the industry has experienced great revenue growth, the average fee paid by members per dollar has decreased by about 9%. In 2016, this was about 87 basis points which has been reduced to 80. But that 9% decrease has been masked by investors moving into more expensive funds i.e., from conservative to growth products generally.

In 2016, conservative and moderate categories, which are cheaper, accounted for about 45% of assets under management and now make up only 27%, says Bunkall. “Investors have preferred to shift more recently into growthier, more expensive,

KiwiSaver options. That has meant a lot of the fee deductions in those more expensive categories have been negated. If we actually look into it, the average balanced category has gone down by 16% and the average growth has gone down by 22%.”

Asset allocation

Investors are starting to take note, checking their risk profile and moving towards growth funds. In 2011 overall asset allocation was 60% income and 40% growth. This is now more like 45% income and 55% growth.

This shift is not uniform across providers, though. Analysis of the banks, Milford and Fisher Funds revealed some quite varying splits with one of the most conservative providers members split 50/50, while one of the most aggressive providers coming in at 61/39 towards growth.

“A provider with 50/50 is going to have a lot of headwinds trying to generate market share compared to one focused on market progression,” says Bunkall.

Exposure to international equity ranges from 30% to 50%, NZ equities from 9%-18% and alternatives from 0%-9%.

For the September quarter the five largest KiwiSaver providers accounted for approximately 68% of assets and fees but the landscape is changing. ANZ led the market share with more than $18.8 billion followed by Fisher (15.5%) which knocked ASB back to third place. BT (Westpac) dropped to the fourth spot ahead of Milford, which debuted in the top five.

Almost all multisector KiwiSaver funds produced negative returns over the September quarter. Average returns from the multisector category after fees and before tax ranged from -1% for conservative funds to -3.1% for the aggressive category. Among the defaults, SuperLife did best, losing the least.

Over 10 years, the average annual return for aggressive funds was 8.0%, followed by growth (7.6%), balanced (6.1%), moderate (4.3%), and conservative (3.9%).

Over longer periods, Quay Street, Milford and Generate continued to perform well across the categories in most periods.

With an average balance of more than $120,000, KiwiWrap is way ahead of other KiwiSaver providers, although it has under 300 members.

Melville Jessup Weaver’s KiwiSaver market review for the year to March 2023 revealed the top ten providers for average balance size, with only one major bank making the leaderboard.

The Consilium-owned KiwiWrap KiwiSaver Scheme is a self-select scheme designed for investors wanting customisable investment choices. It focuses on making sure its members benefit from financial advice through advisers who can monitor and report on clients’ portfolios through Consilium Wrap (FNZ). They and investors have access to more than 400 investment options, including international shares, ETFs and bonds.

From KiwiWrap’s $120,000 it was quite a drop to the next three biggest balances on average; MAS at around $70,000 followed closely by Craigs and Milford. Coming in at just below $60,000 were Maritimes, newcomer Sharesies (with just 16 members at the period covered by the report) and Summer. They were followed by ANZ’s OneAnswer, Select and InvestNow all hovering above $50,000.

The bottom five (all around the national average of $27,000) were Booster, Aurora, BCF (Brethren Christian Fellowship), the Muslim targeted AE (Always Ethical) and BNZ.

The report looked at the highest and lowest contribution ratio. Sharesies and KiwWRAP led but because of their low membership numbers were not that informative but the next three NZDF, Maritime and Supereasy (at 80% or just above contribution rates), which the report said, may reflect good engagement with restricted membership pools. Aurora, Kernel, Kōura, Pathfinder and BCF all had high engagement rates of just below 80%.

Changes bubbling from below

On other key statistics, rankings by member numbers were fairly static with ANZ at the top, followed by ASB, Westpac, KiwiWealth (now part of Fisher Funds) and BNZ . However, five schemes managed to grow their member base by more than 10,000 people, with Simplicity adding more than 15,000.

For assets under management in a single fund, ASB KiwiSaver Scheme overtook ANZ to reclaim the title of largest single scheme (almost $14.5 billion with $464m added).

Otherwise, the ordering of the top ten schemes did not change ASB, ANZ, Westpac, BNZ and AMP. In terms of asset growth, Milford stood out with a gain of $832m, significantly reducing the gap to AMP in fifth place.

Fisher Two added $681m, although this mostly reflects the transfer in from the Aon scheme which was closed over the year. Generate, the aforementioned ASB, and BNZ round out the top five in terms of growth. Several smaller providers have seen strong growth relative to their asset base. Aurora and Kōura more than doubled in size, while InvestNow was just shy of this mark. In its first five months, Kernel gathered $43m.

Once accounting for consolidated ownership, competitiveness measures weakened this year, bucking the trend seen since 2015. The purchase of Kiwi Wealth by Fisher was the main driver.

In aggregate, Fisher Funds accounted for $14.4b, having taken over the Kiwi Wealth KiwiSaver Scheme which had $6.7b under management as of March 2023. This saw Fisher Funds group reach a comparable size to ASB ($14.5b). ANZ group ($18.7 billion) remains the largest KiwiSaver participant.

Once accounting for consolidated ownership, competitiveness measures weakened this year, bucking the trend seen since 2015. The purchase of Kiwi Wealth by Fisher was the main driver, the report said.

Calls for changes to KiwiSaver are growing louder.

Milford is the latest KiwiSaver provider to call for changes to the $100 billion scheme, saying the current setup won’t support members’ retirement aspirations.

Murray Harris, head of KiwiSaver and Distribution at Milford, says although many members are contributing the minimum 3% of their salaries, that is not enough, given the importance of the scheme to Kiwi's financial futures.

Recently, Simplicity founder Sam Stubbs told Good Returns TV it's time to make changes to the scheme. (You can watch the video here).

Added to these calls the Financial Services Council outlined areas it wants to see changes in.

Chief executive Richard Klipin recently said: “The FSC is calling for a full review of KiwiSaver".

Harris says the scheme has been very successful in gathering membership, but several changes need to be made for KiwiSaver to better support New Zealanders in retirement, including:

• A gradual annual increase of 0.5% to contribution rates, reaching a total contribution of at least 10%
• Tax relief or concessions on contributions rather than PAYE rates to incentivise members to contribute
• Potential decoupling of employee and employer contributions for lower income workers so they could receive employer contributions, even if not contributing themselves, with potential tax relief for the employer

Harris points to Australia as a good example for New Zealand to follow. Its compulsory savings rate is 11%, increasing to 12% by 2025. Contributions are generally taxed at a flat rate of 15%.

“People have this mindset that if they are in KiwiSaver, they’re okay,” Harris says. “But really they’re probably only saving about half as much as they need to be.

"As an industry, we’re looking at how we can help people understand how much they need to save for a comfortable retirement and then help them achieve that. Advice and education is really important, as well as an upgrade of the KiwiSaver scheme.”

The FSC says “we know there are substantive and strategic issues around contribution levels, the age of retirement, the 25% gender retirement gap, and the fact that 53% of us aren’t able to access $5,000 in time of emergency.

“These require serious attention if we are to make KiwiSaver a best in class system globally."

Fee revenue from KiwiSaver dropped 8.1% in the year to 31 March 2023 says the latest Financial Markets Authority’s KiwiSaver annual report.

It’s the first year since the start of KiwiSaver that total fees have not risen – the combined effect of lower default fund fees, reductions in management fees by larger providers, some providers removing fixed membership fees altogether and others not earning the same level of performance fees.

Administration fees charged this year were the lowest ever, $17.3 million – a 65.7% fall from last year’s $50.3 million and down 81.2% from their peak in the year to March 2019.

John Horner, FMA director markets,investors and reporting, says it’s an important milestone as the FMA has been encouraging providers to share economic benefits of scale with members.

“Reducing fees is a meaningful way to do this because members retain more in their balances to benefit from compounding returns, but value for money is not just about fees. We will continue to work with supervisors to ensure managers demonstrate their value-add to members. The value-add should include investment and risk management competence which contributes to members’ balances, and advice which helps members make good decisions.”

The report says value for money means members should receive appropriate value for what they pay, and both value and price should be transparent.

“Fund managers can provide value for investors in many ways, including by spending on systems that reduce the risk of disruptions or pricing errors, by proactively offering investors meaningful on-going financial advice to improve their investment decisions, or by having investment processes that demonstrably add value. KiwiSaver providers have reviewed, and their respective supervisors have assessed value for money in recent months. It is part of the supervisor's role to report any concerns to us and we will respond as appropriate.”

FUM and returns
The total funds under management (FUM) was $93.7 billion – a 4.3% rise, year-on-year, and almost double 2018.
This year’s growth is largely thanks to the combined contributions of members, their employers and the Crown, worth $10.5 billion (down 6.7%). The cumulative impact of contributions significantly outweighs the cumulative impact of returns, highlighting the importance of regular contributions.

Conversely, net investment returns equated to a combined loss of $1.9 billion – a turnaround after last year’s $1.3 billion gain. The FMA puts this down to price decline in global equities and bonds through most of 2022. Total FUM with a conservative risk profile fell by 1% to just under $18 billion, after a 7% fall in members.

Conversely, balanced funds grew the most, by 6.3% to $28 billion, after a 7% gain in members.

Growth continued to be the biggest category at $40 billion (up 3.9%) and the most members (1.45 million). This was the first full year that default members were in funds with a balanced risk profile – resulting from the Government’s changes to the default settings implemented in December 2021. The value of default members’ savings was $2.7 billion as at 31 March 2023.

Changes between providers (including movements to different risk types) were 131,260, down 16.8% on 2021, and the lowest number since 2013.

Almost two thirds of the population has a KiwiSaver account with membership growing 2.7% on last year.

Withdrawals
Member contributions ($6.5b) fell 15% on the previous year mainly due to a 63% fall in lump sum payments. The number of members classed as non-contributing rose by 0.5% while  the number of members on savings suspensions is up 19.8%.

In total members withdrew $4.2b, up 11.7% with the largest category by value being members 65 and older who collectively withdrew more than $2.8b, up 46.3% year-on-year.
The report says this might have been due in part to higher term deposit rates on offer. The report said more than 170,000 over-65s remain KiwiSaver members and more are joining. The proportion of new over-65s has risen in the past three years from 1.44% in 2020 to 2.71% in 2022 according to Inland Revenue.
Hardship withdrawals were up 36.7% compared to 2022. They hit their highest level in the wake of COVID lockdowns but it is concerning to see them rising again, the report says. Conversely first home purchase withdrawals fell 35.6% to a level last seen in 2018-19.

Changing investment profile of KiwiSaver over time
Since 2020, the proportion of people in conservative funds has reduced from 35% to 21%. Those in balanced funds have increased from 21% to 30%, with members in the new default fund representing a third of those. Selection of growth funds has increased from 33% to 37% in the last three years.
Over a 10-year period there is a complete reversal of the earlier preference for conservative, over growth funds: relative to the 2013 KiwiSaver Report when 40% of investors were in conservative funds (including default funds) and 23% were in growth. In 2023 the proportions are 21% (noting default funds are now balanced) and 37%.