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FMA KiwiSaver report: Contributions, fund-switching and fees

The just released FMA report has shown that contributions have aided growth under pressure, also comments on fund switching and provider fees.

Friday, October 2nd 2020, 6:00AM 5 Comments

by Daniel Smith

Liam Mason

KiwiSaver has continued to grow despite market volatility caused by Covid, according to the FMA’s KiwiSaver Annual Report.

Total funds under management increased 8.7% to $62 billion, compared to 2019 when total assets grew by 17%. Meanwhile, total membership increased 3.1% to three million, the same growth rate as 2019.

Many KiwiSaver funds dipped after world markets experienced a sharp decline in the beginning of March 2020. Over the year, KiwiSaver investment returns fell 122% from $3.8 billion to -$820.9 million, this decrease followed several years of double-digit growth in investment returns. Since the end of March markets have recovered.

Liam Mason, FMA director of regulation, told Good Returns that he was not surprised by KiwiSaver’s resilience under pressure, “this is a long-term savings vehicle. It’s set up to be retirement savings so it’s built to be able to perform throughout good years and bad.”

Mason went on to say that the success of KiwiSaver over Covid was a “story of the importance of contributions. Despite investment losses KiwiSaver still grew. Member and employer contributions is what made KiwiSaver grow this year. In good times or bad, contributions add to your savings.”

The report also commented on the high level of fund switching that KiwiSaver providers saw during the economic hit in march. Mason has said that the FMA are currently researching into the switching behaviour of members seen during this period to better implement education surrounding investment resilience. They are also researching the kind of help that providers offered during this period to make sure their clients made good switching decisions.

“Education is really important. The challenge that we saw through March was that very often your decision about your risk appetite and therefore your fund choice is made in the good times. For a number of people that theoretical risk appetite did not stand up against the reality of a volatile market.”

David Boyle of Mint Asset Management told Good Returns that “the switching is being driven by a whole lot of reasons and not just performance. It could also be advertising. There is also a lot more aggressive behaviour in the market. We are entering the next stage of KiwiSaver’s evolution.”

“We are in uncharted waters, we have two elections coming up, we have quite a lot of storms on the horizon which will only make investors more uncomfortable when they see negative returns. This is where the work needs to be done by KiwiSaver providers to help members to avoid realising those losses and reinforce the long-term nature of what KiwiSaver is about.”

Another important aspect raised by the report was the issue of fees. Mason said while most fund balances grew over the year due to contributions, fees were brought into stark relief because members would have likely seen negative returns for the first time.

The way that active and passive management corresponds to fees has been a focus for the FMA for some time, Mason says that there is more work to be done. “We will be looking further into how a fund describes an investment style and what they are actually delivering. If there are cases where that is misleading then we will act to correct that.”

Beyond this the FMA will also be looking into “additional services” that funds promise such as, impact investment, ESG commitments and extra advice. Mason says that “often these additional services come with a charge. We want to explore whether these services equal value for money.”

Regarding providers following through on their advertised promises Mason says, “more people could definitely be called up”.

Tags: David Boyle FMA KiwiSaver risk

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Comments from our readers

On 2 October 2020 at 8:14 am Elephant1 said:
This report is six months out of date.A lot of comment on funds going backwards ,but how many funds now in negative zones now. I am sorry everything must be done in a timely fashion ,the FMA has badly let themselves down. Please concentrate not on fees but on achievement .Worldwide one of the great NZ product is the Mclaren motor vechile , fantastic car. But it is expensive. Concentrate on poorly performing funds who are charging. Also not in the dim dark past, this report should have been done in under sixty days.

On 2 October 2020 at 10:00 am w k said:
i foresee this to get worst.

the new regulation have raised the bar for financial advisers. in time to come, there will be lesser independent financial advisers.

the risks and costs to the adviser of managing a portfolio for a $1m+ investor client and $100k investor client is more or less the same. however, the returns for the adviser for the work done for the $1m+ investor and the $100k investor is not. it will become less viable taking on the small investors who, unfortunately, are the majority.

hence, the ones who needed advice most, will be the ones who not get the "good customer/consumer outcome" as they will find it hard to find an adviser who will sit down with them for a heart-to-heart conversation.

just my thoughts, and i hope that i am wrong.

On 2 October 2020 at 10:22 am Davidvs said:
Great to have this report out. However it does confirms that KiwiSaver is proving more of a boon for the providers than for most members.
The most telling comment in the report to me was;
'During the year we saw relatively small movements in management fees, with average fees charged across the range of KiwiSaver fund types largely unchanged in percentage terms when compared with five years ago.'

Since the 2015 report year end KiwiSaver FUM has grown 117.5% while revenues to providers have grown....117.5%. This is despite the entry of several new low cost providers in recent years which indicates that some providers are increasing their average % revenues even while FUM grows significantly.
Hence no benefits of increasing scale accruing on average across the KS industry to members. Is it time for a stronger position on this issue to be taken by the regulators given competition alone doesn't seem to be providing the panacea for this issue?
On 2 October 2020 at 1:31 pm Austin Fishet said:
The next default providers review will be interesting because those default fund KS products are the only ones where the Gvt has any form of leverage over the fee levels.

If Govt did insist on much lower fees from default providers, then that may encourage people to actively move to default funds!

If FMA and providers can let go of the notion that default funds are "bad" - we can all get on with living full and productive lives.

On 2 October 2020 at 2:52 pm John Milner said:
It would appear competition is not driving fees down. So much for market forces.
If advisers were able to receive a reasonable fee from the client for the value they could add, you would not see as many short sighted asset allocation changes as there has been in choppy markets of late. I for one have not participated in KiwiSaver, as I don’t accept payment from the very managers I would recommend. And have to make a living as a business owner. No room for lost leaders on my watch.
A past suggestion from the FMA has been for investors to seek advice from an adviser once they reach retirement and can disengage from KiwiSaver. Yeah that’s going to work - not.

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