KiwiSaver managers making “excessive profits”

Simplicity cuts KiwiSaver fees and complains other managers are charging too much.

KiwiSaver manager Simplicity has made a 3.3% total fee cut across its conservative, balanced and growth KiwiSaver funds and diversified investment funds. The new total fund charge will be 0.30%, effective April 1. The fee cut is the fifth in five years.

Simplicity removed annual member fees for investors under the age of 18 in 2018, and the following year moved to a single member fee regardless of the number of funds held by an investor. In 2020 the membership fee was reduced by $10, and this fee was eliminated for all members in December 2021.

“As a non-profit, we continue to pass on the benefits of scale to our members,” Simplicity managing director Sam Stubbs said. “And we’re on track for more fee cuts in the future.”

Stubbs was very critical of the excessive profits being made by many KiwiSaver managers.

“The FMA annual KiwiSaver report showed fees in 2022 were $692 million. That’s almost $1.9 million every calendar day,” he said.

“Yet being a KiwiSaver manager requires no statutory capital, and involves huge economies of scale,” he said. “Fee cuts in our industry should be frequent, but they aren’t.”

The June Quarter 2022 Morningstar KiwiSaver survey shows the average asset based fee for conservative funds is 0.63%, Balanced funds 0.86% and Growth funds 1.03%.

Simplicity’s current fee for all its diversified funds is 0.31%, ie. 51%-69% lower than the industry average.

“The maths is tragic, because the numbers suggest that as much as 50% of KiwiSaver fees, which ordinary New Zealanders pay out of their savings, is either profits for the fund managers, or commissions for financial advisors,” Stubbs said.

“That suggests potentially $345 million in excess fees last year,” he said.

“KiwiSaver is a wonderful retirement scheme. But sadly, too many in the finance industry treat it like a trough of fees, with too few benefits of scale passing back to their members,” he said.

Call for simple KiwiSaver benchmarks to replace ‘Frankenstein constructs’

KiwiSaver benchmarks, while fulfilling a government mandate, don’t serve much purpose, a new study says.

While the first part of Russell Investment NZ’s research, released last year, focused on institutional benchmarking practices, the second considers KiwiSaver. It concludes that most benchmarks are composed of a hodgepodge of unrecognisable underlying fund benchmarks providing little relevant information to members.

For example a survey of the ten biggest providers found 40 different indices used to represent seven asset classes, and for one Balanced Fund, a bewildering 17 separate indices including six for one asset class – Australasian equities – were used.

Report author, Russell CEO Matthew Arnold thinks the practice should stop.

Under KiwiSaver, employees rather than employers have the responsibility of choosing a retirement product and strategy, so given low levels of financial literacy, KiwiSaver needs to be simple and transparent. It would also provide an easier means for financial advisors to judge the overall results of KiwiSavers, both stock selection and asset allocation, he says.

“KiwiSaver providers are required by law to assign an appropriate performance benchmark so members can compare their performance to the market. They should be widely recognised and reflect the nature and risk of the underlying assets so members can assess whether their returns are appropriate given the fees paid and risk taken. Added value and underperformance should be clear.”

So are KiwiSaver benchmarks delivering this objective? Arnold says no, with most being inaccessible and giving people no clue as to what they are, what’s in them, and how they are constructed or managed.

They are also investable – not representing any alternative to investors, change regularly, so are not consistent, and are highly customised, so hard to compare to each other.  “Their use as a comparison tool and KiwiSaver measuring stick is limited.”

Arnold thinks the industry should follow the lead of the National Super Fund which takes a reference portfolio approach.

“KiwiSaver would benefit from the introduction of Reference Portfolios – KiwiSaver Benchmarks – that are consistently applied to all funds of the same risk category – conservative, moderate, balanced, growth, and aggressive growth.” Arnold says a good portfolio benchmark should reflect the opportunity set, be transparent and measurable, and unambiguous in its construction and, hopefully, represent the basis of an investable alternative.

A better way forward

The  ideal would be straightforward, transparent and  representative of the opportunity set with 20% of the benchmarks made up of  local assets, and with a consistent ‘neutral’ hedging strategy – 100% for global fixed interest and 50% for global shares.

They would use  widely accepted global indices as component benchmarks such as MSCI All Country World Index (ACWI) Net Total Return for global shares; Bloomberg Global Aggregate Bond Index NZD-Hedged, Total Return for global bonds; S&P/NZX 50 Total Return with imputation credits for local shares; and, the Bloomberg NZBond Composite 0+ Yr Index Total Return for local bonds, be rebalanced annually, and be investable.

Some KiwiSaver providers such as Pathfinder are using Morningstar’s NZD Target Allocation indices which calculates a selection of diversified multi sector fund benchmarks for the New Zealand market but Arnold says while these indices share many of the positive characteristics of the KiwiSaver Benchmarks proposed in the report, there is still an undesirable level of complexity and lack of investability.

Benchmarking for active decisions

The impact of Responsible Investment decisions (and other active decisions) should also be clearly attributed and accounted for. That means tracking total portfolio or KiwiSaver fund results versus broad market benchmarks rather than heavily modified ESG indices.

“Then, members would be better able to assess whether their Responsible Investment decisions have added or detracted value enabling a greater understanding of whether the KiwiSaver fund was meeting their needs.

“To be clear, we are not making an assessment of the Responsible Investment practices of local fund managers, or suggesting that investors avoid considering ESG factors (we have a detailed set of beliefs, policies and procedures ourselves). We are simply stating that investors should consider any moves away from the broad, investable universe as active decisions.”

Arnold thinks the KiwiSaver benchmarks could also be used by other comparable defined contribution schemes such as corporate, public and industry retirement plans to monitor their progress and performance. This would benefit all members in New Zealand retirement schemes by improving transparency, and making progress comparable.

What about the Default KiwiSaver schemes, which are mandated to exclude securities from certain sectors? “While some may argue there is cause to exclude the securities from the manager benchmarks given the restrictions imposed on them by the government, we believe the full impact of these decisions should be made clear through benchmarking, i.e. core broad benchmarks should be used.

“An equitable, low cost strategy for default schemes would be for all providers to manage their schemes passively against the relevant benchmark, all for the same fee. That would be fairer than the current situation where chance plays too great a role in deciding the relative outcome for members simply due to a random allocation process.”

Big KiwiSaver providers go for digital tools for advice

Big KiwiSaver managers continue to ramp up use of digital tools to steer jittery investors and beleaguered KiwiSaver members onto the right investment path.

New Zealand’s second largest KiwiSaver provider ASB is launching a new KiwiSaver advice tool on its mobile app and online banking platforms and Kiwi Wealth has incorporated the messaging system into its online portal.

ASB Head of KiwiSaver Distribution, Hamish Davidson, sees ASB has seen a lot more correspondence in the past 12 months around market volatility.

“With Covid, KiwiSaver customers right across New Zealand tended to overreact and change their funds which may or may not have been the right thing to do. So we’ve tried to engage with a lot more people over the phone. This time not as many have moved to more conservative funds as they did when Covid broke out.”

Davidson says partnering with BlackRock has provided more access to information which the bank has shared with customers.

“We know for a fact there are still a lot of people in New Zealand who don't necessarily understand KiwiSaver or don't use it as effectively as they possibly could.”

ASB research in the third quarter shows Kiwi are not confident in their retirement plans with 64% believing they need to be saving more for retirement and around a quarter (27%) having a clear idea how much money they’ll need. Of the almost 1000 New Zealanders surveyed, only 23% say they have a good overall understanding of KiwiSaver.

The digital tool will allow customers to do a bit of a sanity check themselves and self-service with personalised information on the right KiwiSaver fund and contribution level. They will also be able to make changes but if they still need to talk to someone they will call and talk to a specialist.”

Meanwhile Kiwi Wealth says it is already seeing customer behaviour change through use of its new messaging platform.

Chief executive, Rhiannon McKinnon, says during periods of market volatility, making short-term decisions can cost investors significant returns over the long run.

“Our commitment to reach customers on their terms and with the right support helps them make good decisions to grow and protect their long-term wealth.”

Kiwi Wealth has sent 1.4 million targeted, personalised messages with information. McKinnon says of the viewed messages, 25% have led to direct action, such as using digital advice tools to review their fund choices and risk appetite.

A recent test showed a 22% increase in customers using digital advice to help them select the right fund.

Kiwi Wealth joins ANZ, BNZ, Kiwibank and Southern Cross Health as users of the Atomic messaging platform. Digital advice tools are also available from BetterSaver, kōura Wealth, Nikko Asset Management and Milford Asset Management.

Sharesies launches Kiwisaver scheme

Sharesis has been granted a managed investment scheme licence and plans to roll out a KiwiSaver scheme next year.

Sharesies will be launching a KiwiSaver scheme in the first half of 2023 with Kiwis able join the waitlist for early access.

The KiwiSaver scheme is described as a natural step in Sharesies evolution since it launched in 2017 and its co-founder and 3EO, Leighton Roberts says it was always their intention to broaden offerings to include a range of money opportunities so everyone can grow their long-term wealth whether they have $5 or $5 million.

“KiwiSaver is an amazing initiative and we’d like to see people become more engaged with theirs. It’s where most Kiwis are regularly investing, yet when we asked people about their Kiwisaver account many didn’t feel connected to this investment.”

Since launching, Sharesies has helped to build a more confident and experienced community of investors by removing the barrier that prices and jargon people out of other financial markets and it aims to do the same for KiwiSaver members.

“Sharesies believes in encouraging and supporting people to take more control of their financial destinies. We’re starting with the basics like we did with share trading by offering a choice of funds and in time we’ll be adding more fund options,”

We’ve partnered with a number of experienced fund managers to provide a range of active and passive managed funds, covering conservative, balanced and growth style, plus an ethical focus.” says Roberts.

Mint Asset Management head of sales and marketing, David Boyle says the scheme is an iteration of where KiwiSaver is evolving and it comes down to distribution channels and the range of platforms and ways to access it.

“I see it as part of the way we get more Kiwis saving. I think it’s a good start and the thing about getting more people connected to their KiwiSaver is not a bad thing if they haven’t been before, but as balances grow they are going to need more face to face with an adviser in the future I think.
He says the scheme shouldn’t be a surprise given Sharesies large customer base-especially with younger people.

“I don’t see it as a negative or something that will materially impact the advice sector, I just see it as another area of access to a product and we want to see more Kiwis use it. But we need it to get started and all credit to any organisation that has the ability to give face to face advice or an option that sits and fits with people's current needs. It's an evolving industry and digital is just part of it.

It's not a silver bullet when it comes to advice but I think it’s a great way to compliment it. “

Sharesies wil provide practical information and educational content to help grow confident investors and it aims to be as transparent as possible which includes letting members look under the bonnet of their KiwiSaver account to see how it ticks.