FMA warns KiwiSaver providers about high fees and too many inactive default investors

Tuesday 9th October 2018

The Financial Markets Authority is warning KiwiSaver investors not to rely on a correlation between funds which charge high fees and those that give good returns.

The FMA’s latest KiwiSaver annual report, released today, has a strong focus on the level of fees charged by KiwiSaver providers, and says that focus isn’t going away this year.

Data in the report shows fees for “active members” (those not in default funds) have almost doubled over the last five years, from $90 per person to $173.

Over the last year alone, average fees rose more than 19 percent. Some of this increase will be related to fund growth, because KiwiSaver providers charge their members a percentage of the amount they have invested. This means that as the amount members have invested rises, so do the fees they pay.

But that isn’t the whole story, with fees paid rising faster than sums invested.

Worse, the FMA’s KiwiSaver Tracker tool, which correlates fund return and fee data, shows “no clear link between higher fees and higher returns, apart from a couple of standout funds”.

FMA director of regulation Liam Mason says that’s the message the organisation is trying to get out to investors - they need to make active choices about their fund.

“We don’t see a strong correlation between fees and returns, but we do see a relationship between fund choice and return.”

He says the FMA hopes that the advent of two low-fees providers - Simplicity and Juno - in the market, will start to move the dial in terms of fees overall.

Juno doesn’t charge fees for savers under 18 years old, and has a graduated structure, so that savers with lower balances pay lower fees.

Another concern is whether KiwiSaver providers are lowering fees as the total amount of money invested increases.

Total KiwiSaver assets rose to $48.6 billion this year, and there are now 2.8 million members, up 4.2 percent since March 2017.

Economies of scale suggest as total funds increase, the percentage fees that providers charge should go down.

That has happened to some extent, Mason says, but it’s important to question whether fees have fallen enough.

“We would have hoped that as funds under management grew, we would have seen fees decline faster, and that members would be getting advantages of economies of scale that come with growth.”

Mason says part of the FMA’s work plan for this year is to look at how fees paid by New Zealanders stack up internationally, and to check whether the definition of an “unreasonable” fee in the KiwiSaver legislation is still fit for purpose.

Meanwhile, the FMA is still concerned that some large KiwiSaver providers aren’t making enough effort to encourage investors to choose a fund that suits their needs, rather than just sticking with the default fund.

Last year the FMA told the CEOs of default KiwiSaver providers they needed to make an effort to contact default members to encourage them to be more proactive about their choice of fund. Some providers have made progress, but others could do far better, the annual report shows.

The largest default provider, AMP, has only 2 percent of its 112,600 default members making an “active choice” about their fund, unchanged from last year and significantly down on 2016. ASB (the second largest default provider, with 90,400 members) and Westpac have only 4 percent and 3 percent of default members making active choices.

At the other end of the scale, small KiwiSaver default provider Booster has 15 percent making active choices, up from 9 percent, and ANZ has 10 percent, up from 5 percent.

“We regard active choices as important as they are a good indication that the provider’s financial literacy efforts have resulted in a member making a meaningful, informed choice in their own interest,” Mason said.

(BusinessDesk)

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