Are KiwiSaver fees too high?

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.

Funds not ‘true to label’: Researcher

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.”

Advice key part of KiwiSaver success: ANZ

Advice is important to make sure New Zealanders get the most out of KiwiSaver, the country’s biggest provider says – but it suggests much of it should be supplied free.

ANZ has released a survey and whitepaper to mark the 10th anniversary of the retirement savings scheme.

It called for the scheme to be made compulsory, for providers to be required to offer free savings advice to members and help for those in the decumulation phase.

It said the need for advice was apparent in the results of a survey of 1000 people,  which showed most had not even worked out how much they were likely to have saved by 65. More than 20% said that was because it was too difficult to do so.

The survey found 28% of respondents said it was best for KiwiSaver funds to be made available as a lump sum at 65. Another 19% thought it was best in installments. More than 40% said a combination would be best.

Almost 30% said they wanted their KiwiSaver provider to give them a set of regular withdrawal options to choose from at retirement, but 62% wanted access to free professional advice.

ANZ said roboadvice would play a bigger part in future advice for KiwiSaver members.

A third of respondents would prefer to get retirement savings advice from a person and 31% said they would use a sophisticated online calculator, either alone or with someone helping them. Just under 20% said they would prefer just online tools and 16% wanted a DIY approach.

Members with little knowledge about KiwiSaver were more likely to want advice from a person, at 47%.

ANZ said the government should also provide some guidance around assumptions and parameters regarding roboadvice to make sure there was consistency in the provision of mass-scale advice.

“At ANZ, we offer free financial advice to ensure members can continue to benefit from exposure to markets, with the right risk profile for their retirement circumstances,” ANZ said.

“We also promote use of the regular withdrawal option to discourage people from impulse buys or reallocating their money to misguided investments. While this is a good first step, there’s still plenty more the government and financial services industry can do to help educate New Zealand’s ageing population on how best to decumulate to achieve a comfortable retirement lifestyle.”

ANZ recommended that KiwiSaver providers be required to check in with members a year after they withdrew money for a first home and encourage them to seek advice. 

It said providers should also encourage female members to get personalised advice.

“The government and financial services industry should work together to enhance the financial capability of New Zealanders receiving NZ Super. This could be in the form of a comprehensive information pack that accompanies SuperGold cards, with directories on where to access financial advice, and a range of investment and decumulation options available to them.”


KiwiSaver members don’t understand MTC

New research from Inland Revenue shows many KiwiSaver members don’t understand how the tax credit works, or what it is.

The Commission for Financial Capability is calling for action from providers to ensure that more people in KiwiSaver receive one of its main benefits: the $521 member tax credit (MTC) paid to members by the government.

The research found that almost half of KiwiSaver members had not heard of the term “member tax credit”. When it was explained to them, 25% were still none the wiser.

People were even unclear about their own funds: Of those who knew about MTCs, some thought they hadn’t received any money when they had. Some thought they had been paid the full amount of $521 when they hadn’t.

The Commission’s education manager David Boyle said: “There’s clearly a lot of confusion, which is frustrating given that KiwiSaver has been with us for ten years. There’s been plenty of time to address this growing issue. 

“Some KiwiSaver providers have told us that the barrier is affordability. Inland Revenue has surveyed a broad range of members to improve understanding about what was stopping them getting some or all of their MTC and to test the affordability theory.

“The research shows that while it was part of the issue, there were other reasons why people missed out. Many said they would have saved in KiwiSaver if they had known about the MTC and they expected their providers to communicate more clearly.”

Last year 1.1 million members missed out on the full MTC. Of that number 580,000 received nothing at all which means they didn’t save anything.

Almost 40% of people who didn’t get the full MTC said they weren’t on a salary or wage and simply forgot to set up a payment.

Boyle said: “It’s disappointing that Kiwis are missing out on money which could help them in the future when they decide to stop work finally.

“It’s the best-known return anyone is going to get on their savings. Simply put, those who are eligible are getting a 50% return on every dollar up to $1043 a year. 

“But once that year goes by, you can’t go back and claim it later. That’s why it is so important to act now and make sure you don’t miss out next year. 

“We had always suspected that awareness was an issue. This research confirms that’s the case and we would encourage providers to do more to get the message out about MTCs.

“It’s worth acknowledging that some are making it a greater priority than others. More action in this area is a win/win for both providers and members.

“At the Commission we will be looking at our own messaging on this topic, and continue to explore what we can do to help reduce this lost opportunity.”

The research came from a survey of 1800 people by Inland Revenue.