[GRTV] Rob Everett on value for money; the great KiwiSaver land grab and fees

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.

Investment avoidance not good enough says Pathfinder

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.

First adviser-led KiwiSaver scheme

Low profile adviser group Aurora Financial has establised a new firm with its own KiwiSaver scheme with a strong ESG focus.

New investment manager, Aurora Capital, is delighted to announce the launch of the Aurora KiwiSaver Scheme. The Aurora KiwiSaver Scheme offers a range of funds that apply environmental, social and governance (ESG) principles, with a specific focus on investments that can improve the health of our planet, such as reducing the impact of climate change.

The initial core offering of the Aurora KiwiSaver Scheme, which is issued and hosted by Wellington-based company Implemented Investment Solutions, is comprised of three funds: the Aurora Conservative Fund, the Aurora Growth Fund, and the Aurora Future Focused Fund. The Aurora KiwiSaver Scheme also offers a lifecycle option, Aurora RetirementPlus, which blends the fund options to provide a targeted level of risk based on age.

The Aurora Conservative Fund and Aurora Growth Fund currently invest into underlying funds managed by Mint Asset Management. The Future Focused Fund invests in BlackRock ETFs, selected by Aurora Capital, that are comprised of companies with high ESG ratings and exposure to specific climate change themes.

Commenting on the launch, CEO and co-founder, Simon Rolland, said “Aurora Capital was created to provide KiwiSaver investors with an opportunity to use investment for good, and all the funds in the Aurora KiwiSaver Scheme are oriented around ESG principles. We are especially thrilled to bring a climate change focused fund to KiwiSaver investors because we believe that solving climate change is one of the greatest challenges we face today.”

Aurora Capital’s co-founder and Chief Investment Officer is Sean Henaghan, a financial services veteran who worked previously at AMP Capital (Australia) where he managed more than A$100 billion in multi-asset portfolios. Henaghan said “KiwiSaver is a long-term investment vehicle – clients that invest with us can create personal financial wealth while also leaving the planet in better shape for future generations. We are proud to be accessing the investment expertise of Mint Asset Management, whom we regard as a high-calibre active investment manager that has integrated ESG considerations into its investment process as well as being a signatory to the UN-supported Principles for Responsible Investment”.

“We are excited to be investing in innovative technologies and solutions that can create positive change for people and help address climate change issues. We have specifically appointed BlackRock for the Future Focused Fund, as their ETFs are best-in-class and are aligned to the climate focus of the Fund,” Mr Henaghan said.

As part of Aurora Capital’s commitment to making a positive impact on the planet, it is proud to support CarbonClick, an Auckland-based technology company that provides individuals and businesses the tools to calculate and offset their carbon emissions. Together with CarbonClick, Aurora Capital will measure, track and offset its own carbon footprint, and will encourage its staff, as well as clients, to consider offsetting their individual carbon footprints, reducing their environmental impact. Aurora Capital and CarbonClick will work together to not just offset emissions, but to educate Aurora Capital’s staff and clients on sustainability and how they can reduce their overall emissions wherever possible. In addition to offsetting, the overarching goal is to reduce gross emissions. Aurora Capital believes this approach is consistent with the goal for the planet, which is to actively reduce the overall carbon footprint.

The Aurora KiwiSaver Scheme offerings will be distributed by financial advice provider, Aurora Financial, which means that all members of the Aurora KiwiSaver Scheme will have access to financial advice through an adviser.

Implemented Investment Solutions Limited is the issuer and manager of the Aurora KiwiSaver Scheme. Aurora Capital Limited is the investment manager of the Aurora KiwiSaver Scheme. A product disclose statement for the Aurora KiwiSaver Scheme can be obtained from the manager at www.iisolutions.co.nz, from the investment manager at www.aurora.co.nz, and via the offer register at https://disclose-register.companiesoffice.govt.nz.

ANZ scales up, drops membership fees

ANZ New Zealand Investments has dropped its annual membership fee from all its managed KiwiSaver schemes.

ANZ Investments will remove the $18 annual membership fee from its ANZ KiwiSaver Scheme, ANZ Default KiwiSaver Scheme and its OneAnswer KiwiSaver Scheme.

It will also reduce management fees of its Conservative Funds (excluding the Default Fund) and Conservative Balanced Funds by 0.22% and 0.15% respectively.

Under the new structure, a person with $20,000 invested in the ANZ KiwiSaver Scheme Conservative Fund would have their fees reduced from $192 to $130 a year.

"These fees will ensure a simpler fee structure and provide greater value for money for our more than 650,000 KiwiSaver members, said ANZ’s acting managing director of funds management Stewart Taylor.

“We regularly review fees as we achieve greater economies of scale. This latest change particularly benefits members with lower balances or those just starting out,” Taylor says.

ANZ Investments has reduced the total fund fee for the ANZ KiwiSaver Scheme by approximately 25% since 2009.

In 2019 it removed the $24 membership fee for members aged under 18 and reduced it to $18 (from $24) for all other members.

The membership fee for over 65s was removed in 2020.

“Through its active management approach, ANZ Investments has delivered strong returns over the long run for our members and this with the reduction in fees is another step to helping our members grow their retirement savings,” Taylor says.

ANZ Investments is the largest private-sector funds management and KiwiSaver provider in the country with more than 650,000 customers and $35 billion under management.