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Plan to help people switch KiwiSaver schemes

A "what's my number" campaign for KiwiSaver providers has been proposed by the Productivity Commission.

Monday, August 19th 2013, 6:57AM 13 Comments

by Susan Edmunds

Advertisements encouraging people to check whether they could save money by switching electricity providers have been very successful.

It prompted 28% more people to switch to another electricity company during the course of the campaign.

As part of a consultation on increasing competition, the commission said there might be similar scope for intervention in KiwiSaver funds management.

"Given that about two million New Zealanders participate in KiwiSaver ... greater competitive pressure in the funds management sector has potential to generate significant benefits for New Zealand investors."

It said this would be made easier by the new periodic reporting requirements.

"Given that there are 50 different KiwiSaver schemes, there may be scope to further increase transparency by collating disclosure information in a single easily accessible location, which -also provides information about how consumers can switch provider. Once the disclosure information is available, this task may well be performed by a private organisation. If that doesn’t occur then there might be a role for government."

But Chapman Tripp partner Mike Woodbury said KiwiSaver was not a fungible commodity like electricity where the cheapest option was by definition the best.

He said funds that did stock selection or had a particular investment strategy could be done a disservice.

Submissions close next week and Woodbury said KiwiSaver providers that focused on growth should offer their perspective.

« [Weekly Wrap] Commission debate continuesIFA working on pro-bono offering »

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Comments from our readers

On 19 August 2013 at 9:50 am Keith Walter said:
So much for the advice process and regulation of the industry!
On 19 August 2013 at 1:30 pm Private sector employee said:
I note the Productivity Commission received $4.691m revenue from the Crown in 2012. At an average 1% management fee, this would be equivalent to $470m FUM for a KiwiSaver scheme. I think I can come up with a way "to generate significant benefits for New Zealand"... and it doesn't involve a 'what's my number' KiwiSaver campaign.
On 19 August 2013 at 2:05 pm Dai said:
If the "Whats my number?" referred to the amount required to be saved OR the amount of income a person needs in retirement, then that would be a great campaign. Focusing on fees misses the main point of KiwiSaver and retirement in general.
On 19 August 2013 at 2:24 pm Independent Observer said:
Agree with Mike Woodbury on this one
On 19 August 2013 at 2:41 pm Amused said:
Is it April Fools' Day already?
On 19 August 2013 at 4:44 pm Kevin said:
This is a disgrace and an insult to advisers who are trying to get through regulation...
On 19 August 2013 at 5:51 pm brent sheather said:
Mr Woodbury needs to do some research before he makes statements like that..numerous academic studies show that fund management is indeed fungible and 99 times out of 100 the cheapest option is the best.

if he is going to make statements like that he needs to disclose any conflicts of interest he/his firm may have. This is a serious issue and we need to have a serious discussion.
On 19 August 2013 at 6:41 pm curious said:
This is the first I have heard of this. Does anyone know where or how submissions can be made?
On 20 August 2013 at 8:23 am Independent Observer said:
Brent you are correct - this is a serious issue, with non factual declarations and references to academic studies unhelpful. There are also numerous studies (rf: BCG, McKinsey, Cerulli) that suggest that consumers get what they pay for...
On 20 August 2013 at 12:00 pm CJM said:
"99 times out of 100 the cheapest option is the best."

Cool, so to pick a KiwiSaver fund all I have to do is pick the one with the lowest fee.

But what if the lowest fee is an ultra conservative cash management fund? Is that then the best KiwiSaver fund for everyone?

Presumably we care about matching the asset allocation of the fund with the individual's objectives.

But "moderate" or "growth" funds can have wide differences in asset allocation. Even when researcher like Morningstar tries to characterise them, they still end up with quite different asset allocation in the same group.

So if one moderate fund had a 50% fixed interest/50% growth allocation and a 0.9% fee, and another moderate fund had a 40% fixed interest/60% growth allocation and a 1.0% fee, which is better for someone who has 25 years to retirement?

This leaves the problem - you might be able to compare fees across funds, but you also need to compare asset allocation. And that is when things gets tricky and hopefully an adviser can add some value.

This is not like power when the electricity is the same whatever company you buy it from.
On 21 August 2013 at 9:31 am David Whyte said:

For what it's worth, here's my submission to the Productivity Commission -
Utilising the “What’s my number” concept so successfully deployed in the retail electricity supply sector, to the retirement saving product – KiwiSaver – is inappropriate, and displays a fundamental lack of understanding of the nature of long-term investments.
Providing an instantly consumable commodity such as electricity can be successfully brought under competitive pressure by price comparisons as has been proved. Electricity is a uniform and homogeneous product – i.e. there are not varying types of electricity. In other words, it is not possible to pay more to obtain ‘better’ electricity. It is possible to secure a more reliable delivery service, but as delivery itself has been commoditised, the only remaining variant is price – hence the success of the “What’s my number” campaign.

Accumulating funds for retirement is an entirely different type of product for the following reasons;

1. There are differing qualitative aspects to the product providers, e.g., the now defunct Hujlich Funds Management entity versus Grosvenor Investment Services Ltd.

2. There is no common formula used by all providers for delivering the ultimate end result for the consumer.

3. Fees charged have an influence on outcome, but are not a determinant; investment capabilities, consistency of methodology, and movements in markets collectively have a greater impact on returns obtained.

4. Investment yields can be severely impacted by chasing any one input factor highest past performance (no guarantee of future advantage) or lowest fees (no guarantee of better returns).

Any quantitative analysis of performance will reflect the qualitative aspects of management consistency, ability to minimise investment risk, management expertise and fees charged. But to isolate one input factor and to suggest that by constantly switching to the lowest charging vehicle the consumer will gain an advantage is disingenuous, simplistic, and quite incorrect.
Kiwisaver has been a credible attempt at influencing New Zealanders to take a positive step toward financial independence in retirement. Political intrusion has hampered the progress of the concept, and making funds accessible to first-time home buyers is a stark example of this interference.
Retirement savings vehicles should be single-purpose products which are not accessible for other unrelated uses.
It may be attractive to buy a few votes by opening access to funds to be used as a deposit on a first home, but this political expediency should not be allowed to interfere with the future well-being and prosperity of retirement savers.
If investment behaviour needs to be influenced positively, certain asset classes need to be made more attractive (KiwiSaver) and conversely, other asset classes less attractive (second and subsequent residential investments). Quite simply, a Capital Gains Tax on such investment properties levied at a rate of 30% between the buying and selling price of the properties will reduce speculation and ease the current price pressure on housing stock as more property becomes available for primary owner-occupier purchases.
This will also eliminate the need to have people steal from their own futures by depleting the most valuable investment element of their accumulation time-span, i.e. the money that is invested earliest and for the longest time, allowing optimal accrual opportunity to occur.
In conclusion, the difference between the best performing KiwiSaver funds and the worst performers is not solely attributable to fees charged. Other quantitative aspects as outlined above are of much more significance and the suggestion that constantly switching to the lowest charging fund will maximise yields is somewhat eccentric to say the least.

On 21 August 2013 at 4:01 pm Kevin said:
Perhaps at the end of the million dollar TV ad they could ask if you'd like fries with that and offer Meridan shares on deferred payment?
On 23 August 2013 at 5:31 pm Phil Harris said:
The productivity commission needs to spend its $4.691m budget on getting up to speed in financial literacy.
It does not require much intellectual grunt to work out that fees alone provide only part of the picture.
In my view there are 4 critical elements which need to be considered when making an active kiwisaver choice. these are as follows:
Characteristics of performance (related to Profile and volatility)
Liquidity (related to the amount of unlisted property in the portfolios)

Take just two of those elements such as fees and performance.
In the conservative fund profile I looked at one of the more expensive funds performance numbers and compared it against oner of the cheapest funds performance numbers. The fee differential was 0.151%pa but the performance differential was 2.03%pa each year and every year over a 5 year period.
So,admittably you cannot always rely on performance, but it is fair to say that fees only comparisons is just plainly rediculous,let alone bringing the other elements of decision making above into the equation.
It is even more important that kiwisaver contributors understand the performance characteristics of the different funds available so that there are no unexpected nasty surprises on the downside, nor disappointment on the upside as performance improves by not being profiled, educated and advised correctly.

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