KiwiSaver 2022: higher fees, lower investment returns

New Zealand’s 3.168 million KiwiSaver members paid $692 million in fees in 2022, a 6.9% increase from the previous year. These fees – a combination of administration and management charges –  chewed up more than half of members’ investment returns, which this year dropped 90% to $1.3b.

Income from administration fees fell from $80.8m last year to $50.3m in 2022 but income from management fees jumped 12.8% to $642.3m.

These are among a raft of figures released this morning by the Financial Markets Authority (FMA) in its annual KiwiSaver report, covering the period from 1 July 2021 to 30 June 2022.

The FMA says the rise in fees reflects a 10% hike in funds under management, from $81.2b to $89.7b. Almost half of the rise in FUM was in growth funds, totalling $38.5b and up 17.7% year-on-year. Investment in conservative funds dropped by 14.4% over the year to $18.2b, largely because default fund members were moved to balanced funds which rose 20.8% to $26.4b.

The FMA says the shift in the amounts invested in different fund types is consistent with a longer-term trend where the numbers of investors in conservative funds (excluding previous default members) has shrunk 3.6% from 2017 to 2022 while growth fund membership has ballooned 54.8% in the same period, now accounting for nearly half of overall membership.

Contrary to what members might expect, the FMA says its KiwiSaver Tracker data reveals negative average returns for conservative funds for the year while growth funds reported positive average returns. “This is likely to be influenced by most conservative funds weighting towards bonds which suffered significant price declines.”

Of the 3.168m KiwiSaver members, only 1.9m are contributing. But the FMA says the $11.3m in contributions from these investors is largely behind the growth in FUM and includes a significant 20.3% increase in lump sum contributions, totaling $2.2b. Just over $5b in contributions came from wages and salaries last year.

Fifteen years after KiwiSaver was introduced, the average balance stands at $28,324. However, actuaries have pointed out that a few very high balances skew these figures, meaning the average balance doesn’t necessarily reflect the state of most KiwiSaver accounts which are likely to have considerably lower balances.

Membership withdrawals were up 24% to $3.8b over the year, with the over-65s showing a 59% rise to $1.95b. For the first time, retiree withdrawals exceeded those by first-home buyers, who collectively pulled out $1.44b. This spike was a “big surprise,” the FMA said, and was almost double the amount withdrawn the previous year. The number of retirees closing their KiwiSaver accounts was up 10% to 21,466 but the number of over-65s who remain in the scheme is up 14%.

With lower unemployment, significant hardship withdrawals were down 33.4% to $106m while withdrawals by those with life-shortening congenital conditions rose 49.9%. This is the first full year that people with Downs syndrome, cerebral palsy, Huntington’s disease and foetal alcohol spectrum disorder could automatically apply.

“The data in this year’s KiwiSaver annual report shows the strength of KiwiSaver as a long-term savings vehicle, with resilience to volatility a necessary feature of its design,” says Paul Gregory, the FMA’s director of investment management. “While we celebrate World Investor Week, the report reinforces our messages about taking a long-term view of investing.”

Gregory says New Zealanders have become increasingly aware of the role KiwiSaver can play in their financial well-being and preparedness for retirement, particularly when home ownership becomes less certain.

“This is the context for our work in KiwiSaver, including focusing on the value members receive for the fees they pay and the risk they take. This conversation about value is holistic in its approach, considering KiwiSaver providers’ investment returns, the help provided to members for good investment decisions and other value-adding features and services.”

As part of its value-for-money fees initiative, the FMA released a report in April this year which said the “repeatable competence” shown by fund managers is being eroded by high fees. Fund managers are not using appropriate indexes to benchmark their performance and managers often pay commissions to third parties to grow membership numbers, meaning all members incur outgoing fees and costs without this being clearly disclosed, the FMA said.

It will be cracking down in all three areas in the coming year via a self-assessment questionnaire for fund managers and “other regulatory tools” if persistent conduct issues are found.

However, the FMA says it has been encouraged by the drop in average fees paid by default members and only a small increase for active members. On average, default members paid $64 (down 11%) while active members paid $245 (up 2.1%).