KiwiSaver

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%.

Parliament’s finance and expenditure committee has called for public submissions on the Employment Relations (Protection for Kiwisaver Members) Amendment Bill.

The private member’s bill, introduced last month by Labour backbencher Dr Tracey McLellan, aims to restore some financial protections originally given to KiwiSaver members by the Employment Relations Act 2000.

That was amended by the National government’s Employment Relations Amendment Act 2008, resulting in employers not being legally required to offer the same terms or benefits to KiwiSaver members as non-members.

Under current legislation, employers are not legally obliged to offer workers enrolled in KiwiSaver the same terms of employment, salary or wages, conditions of work, fringe benefits, or opportunities for training and promotion and transfer, as a worker not enrolled in the scheme. Employers can also offset pay increases against workers’ KiwiSaver contributions.

These settings could potentially disadvantage New Zealanders saving for their retirement, as they expose KiwiSaver members to potential discrimination due to their membership, meaning they may receive lesser protections than people who are not members of KiwiSaver.

The new bill aims to ensure workers can’t be discriminated against because they are members of a KiwiSaver scheme or a complying superannuation fund. It also aims to achieve more equal employment relations conditions for KiwiSaver members as those who do not belong to the scheme.

McLellan, who is MP for Banks Peninsula, says there are numerous examples of employees being offered, for example, $60,000 in wages but it turns out to include the employer contribution to KiwiSaver.

At its first reading in parliament, the bill enjoyed wide support on both sides of the house with109 ‘ayes’ and 10 ‘noes,’ all fromthe the Act party.

Earlier this year the Retirement Commission surveyed more than 300 small, medium, and large organisations about the use of a total remuneration approach to KiwiSaver and found that 45% use the model for at least some employees.

It found 25% of employers included employer KiwiSaver contributions as part of total remuneration. A further 20% adopted both approaches, paying some employees earnings plus KiwiSaver, and others earnings inclusive of KiwiSaver.

Retirement Commissioner Jane Wrightson said it was disappointing and not how KiwiSaver was designed to operate, “…as the legislation clearly states that compulsory contributions must be paid on top of gross salary or wages except to the extent that parties otherwise agree. However it is not prohibited as long as the outcome is the result of good faith bargaining.”

With the election roughly one month away if McLellan is not re-elected or doesn’t get through on the list, she is number 27, the bill may still survive if it is picked up by one of her colleagues.  Submissions close on October 30.

There should be more KiwiSaver investment in private equity as long as it’s done with the right capability and skill, says Pathfinder CEO John Berry.

“There’s a reason high net worth investors in large, long-term sophisticated endowment funds invest in private assets. Over the long term they pay higher returns than listed markets if managed and diversified properly.”

While Pathfinder and other boutique KiwiSaver firms such as Generate and Booster invest in private equity, not enough providers are, says Berry. And KiwiSaver members are missing out.

However managing a private equity inclusive fund “properly” comes at a higher cost.

Pathfinder charges 0.84% to 1.29% which among other things covers extra staff, including those who look at private deals, plus additional audit and compliance requirements.

Berry would like to see a refinement of fee reporting to break out underlying asset classes such as venture capital (VC), private equity (PE) and infrastructure.

“We've got this drive for transparency on fees but people don't understand what they're getting in return or what they're not getting. Knowing you’re buying everything in the market in a purely passive simple process for a low fee may be what a lot of people want. But they should be aware of missing out on the opportunity for private equity investment in a more active management style which can be more discerning around things like responsible and ethical investment.”

He says the most important factor is actual returns after fees with Morningstar tables not led by who has the lowest fee but who generates the best returns after fees. “It’s not the low fee providers.

“We need to reorient the conversation around what is important with some simple data points. Past returns and fees are obvious ones, current holdings is another but it's actually returns after fees, not the level of fees.”

Differing shades of active management

Pathfinder CFO Paul Brownsey says there are different levels of active management.

“We're not just active managers in an index fund. We're active managers in private equity, illiquid fixed income bonds and things like that. So we have a bigger opportunity set than an active manager who is deciding whether to buy more Microsoft or Alphabet”.

Berry cites Brownsey’s decision to swing into action when bond markets were wildly overpriced, putting Pathfinder’s fixed income exposure at zero. Another example was in Q1 2020 when Pathfinder’s KiwiSaver conservative fund gained 1.82% compared to an average decline of 2.44%.

“[The outbreak of Covid] was probably the most volatile time in the markets in a short period we’ve ever seen, even more than the GFC which happened over months.” says Brownsey.

“We didn’t have bonds, we had low weights to equities going into that period and took a lot of risk off the table but we put it back after the market bottomed.

“We didn't have any particular insight about it, we were just prepared to take an appropriate risk view on what was happening when the market sold off significantly and then when it came storming back with money chasing.”

He sees no impediments to any KiwiSaver providing having 1-2% in private equity providing they have sensible liquidity risk management.

“Managers could start thinking about clients’ best interests rather than trying to get rid of all risk, extra effort, costs to their business and maximising returns for shareholders.

“The largest [KiwiSaver] fund is now $20 billion; if they put 1% into private equity, that's a lot of investments. In venture capital right now people are writing cheques for $1m to $2m and in PE anything from $1m – $5m.”

Financial adviser role

He says financial advisers have an important role to help clients navigate KiwiSaver. “Don’t just look at fees, look at what you get for the fee and returns after fees. And think about exposure to assets other than conventional listed markets. I think that’s a really important value-add for financial advisers.”

Berry says the more sophisticated the product gets the greater the need for advice.

“If everyone on the market offered simple, standard passive low fee services there’s no room for advisers in KiwiSaver. But you've got around 35 providers and there's so much differentiation between them in terms of active, passive, ethical, private assets, no private assets, there's a real role there for advisers.”

BlackRock out but could come back in

Despite divesting its BlackRock shares, Brownsey hasn’t ruled out investing in BlackRock’s proposed NZ renewable energy fund announced with the government.

Pathfinder decided to ditch its very small global holdings (0.3 to 0.4) after the US mega manager put Aramco CEO Amin Nasser on its board.

But depending how BlackRock’s NZ energy transition fund eventuates, if at all, he would give it due consideration.

“It’s a decision to make at the time; does the good you're investing in stand alone as a positive investment? As advertised, it may well be a great thing, however, we've seen no detail.”

Passive investment and index funds are partly to blame for more KiwiSaver money being funnelled into businesses that harm the environment, animals or people, says Mindful Money CEO Barry Coates.

Of the $98 billion in KiwiSaver, $8.6 billion (8.9%) is invested in unethical stocks, according to new analysis from Mindful Money. This has risen from 7.2% in 2019 when Mindful Money began collecting the data.

Coates says while the surge in fossil fuel prices caused by Russia’s war against Ukraine has seen KiwiSaver money pour into those stocks, passive investment and greater use of external index funds was also responsible. In particular, many passive funds invested in oil and gas companies expanding fossil fuel exploration and production.

Mindful Money divided fossil fuel companies into those transitioning to renewables, those expanding and those doing nothing. Investment in companies transitioning to renewable energy was flat and hasn’t increased as a percentage of KiwiSaver.

“One of the biggest investments in this area is Contact Energy but for other companies on a renewable pathway it is not big. Meanwhile, investment in companies that are expanding – Exxon, Chevron, BP and Shell –  is now $3.2 billion having more than doubled over the eighteen months to March 2023.”

Coates says many funds claim that stewardship and shareholder voting power will encourage companies to change, but over time this approach has been shown to lack credibility.

“There are still only a few fund managers who can show significant results from their engagement activity, and few have a credible pathway to sell their shares if harmful impacts continue.”

He acknowledges that putting more work into screening and engagement might be cause for higher fees.

“There are funds that have good processes to avoid the companies that members of the public are really concerned about. They have to work, and some managers actually are active managers globally.

“I think there's been kind of almost a glorification of low fees but the drive for lower fees is a drive for lower value. That being said, to run now, some index funds that do exclude a lot more than they used to.”

However the issue is not just about active versus passive management, says Coates.

“What kind of passive are we talking about? Are we talking about passive with very few overlays on ethical grounds or the funds that are strongly oriented towards responsible and ethical investment.

“There are now some index providers that provide stronger exclusions; fund managers should be looking at them. For example Beta Shares are passive funds and have a very strong overlay to exclude companies that are problematic.”

Animal harm and human harm

While fossil fuels companies accounted for more than $3 billion of KiwiSaver, $2 billion is invested in those that test products on animals for reasons other than human health.

Meanwhile companies which have or are breaching human rights, including labour rights, trafficking and violence against civilians, are the third biggest recipients. MIndful Money says a total of $1.4 billion is invested in companies such as Meta (digital harm and breaches of privacy), mining company Rio Tinto (environmental and community harm) and Johnson & Johnson which Sustainalytics rates as having a high level of controversy for quality and safety of several products across all three of its business segments — drugs, devices, and consumer products.

Just over $1 billion of KiwiSaver money is invested in companies that cause social harm, including alcohol companies such as Diageo, pornography, gambling and tobacco.

“It is now eight years since there was a public outcry over the amount of KiwiSaver funds in tobacco. The latest data shows an annual growth of 50% in investments in tobacco companies such as Philip Morris, British American Tobacco and Imperial Brands, to more than $21 million.”

Another $292 million is invested in weapons companies, including nuclear weapons producers, such as BAE and Lockheed Martin, and handgun producers and retailers, says the report.

Coates wants more transparency in KiwiSaver schemes. “Few KiwiSaver providers reveal the full list of companies they invest in and none identify the companies that are likely to be of concern to the public. Many people using the Mindful Money website are shocked to find out what companies they are invested in.”

He says the investment sector appears to be an outlier. “Retailers of most consumer products are acutely aware of their customers’ concerns.”

Earlier this year the annual Mindful Money and the Responsible Investment Association of Australasia consumer survey found 74% New Zealanders expect their money to be managed ethically and responsibly.

“The issue for financial advisers and fund managers is who’s going to listen to the clients? There is evidence that clients don’t always raise it proactively in meetings with their advisers but if and when it is raised they have very strong views. It’s an age of climate change and investment has a huge role to play but somehow advisers and fund managers are carrying on as if there is no link.”