Clive Fernandes
Auckland, September 13, 2021
KiwiSaver should work today and tomorrow (Picture from KiwiSaver Annual Report 2020)
This story was updated at 11 pm on Tuesday, September 14, 2021
How have KiwiSaver providers reacted since the FMA tightened their belt?
In April 2021, the Financial Markets Authority (FMA) released guidance regarding fees for all KiwiSaver scheme providers.
Let us look at the types of fees you could be charged, the fund options you have and what value means concerning these.
Types of Fees
These include (a) Set fees: Many funds charge a set fee, commonly called a ‘Members’ Fee.’ These are a set amount, no matter your balance or level of risk. These types of fees can be more transparent because you will be charged the same no matter what happens to your investment. It is easier to track the amount you pay in fees because it will be consistent month on month, year on year (b) Percentage-based fees: Another common fee is a ‘Management Fee.’ This is derived from a percentage of your fund balance. A management fee usually encompasses a lot of smaller fees including fund managers fee, supervisors fee, auditors fee, and account servicing, so it is easier to just call it a management fee (c) Performance fee: A ‘Percentage Fee’ will apply only if your fund overperforms what is expected of it. For example, if you are in a growth fund, it may aim to provide 7% returns after fees. If the fund provides 9% returns after fees, then, Performance Fee would be applied.
Active and Passive Funds
It is important to understand why different types of schemes can charge different levels of fees. Schemes can be separated into active and passive funds.
Active Funds have additional internal costs as the scheme must pay a fund manager to actively manage the investments within the fund. These types of investments, in theory, will usually have a higher fee than passive funds.
Passive Funds have a lower internal cost because they do not have the same type of fund manager to actively manage the investments within the fund. These funds are aimed to be lower cost, but in return normally meet the market index rate, rather than beating it which an active fund aims to do.
The FMA has had its eye on KiwiSaver Managers and their relationship with the activeness of their fund and fees charged, and they found that there was no relationship between these. Overall, the FMA noted that some providers offered poor value in terms of activeness and fees charged. They also found from their annual survey that in KiwiSaver, high fees are not necessarily translating to high performance.
Higher Fee, Higher Returns?
The diagrams here show that in the last five years, there is a pattern of higher fees providing higher returns, however, the correlation for this is only 0.2. The correlation tells us that 2 in 10, or 20% of the time when comparing fees with returns, a higher fee will give higher returns.
(Chart supplied by the Author)
Growth Funds generally charge the highest fees. If we single these out and look at their fees to returns, the correlation is almost 0. There is no obvious relationship between higher fees and higher returns. This poses a serious question: How are these KiwiSaver Managers allowed to charge a higher fee when they are not providing more value for the money we pay them?
Are KiwiSaver Managers starting to reduce their fees?
We have seen some notable changes since the announcement made in April 2011.
(Chart supplied by the Author)
Comparison among banks
Firstly, Westpac announced that they would be removing their $12 administration fee and reducing their fund fees. For example, their Growth Fund fee will drop from 0.8% to 0.55%. If you had a KiwiSaver balance of $20,000, your annual fee would drop from $172 to $110.
Comparing Westpac’s new fee structure to the other three large banks; ANZ charges an administration fee of $18 per year if you meet certain criteria, ASB charges $30 per year and BNZ does not have an administration fee. Neither ASB nor ANZ has suggested that they will be removing their administration fee, but perhaps Westpac’s move will encourage the other major banks to reconsider.
Managed Funds move
Managed fund providers, Milford Assets and Fisher Funds have also recently made a move to reduce or remove their administration fees. Milford assets first decided in December 2020 to reduce its administration fee from $36 to $18. Then, from July 2021, it removed its fee structure. Fisher funds have since followed, reducing its $36 administration fee to $23.40.
It is great to see large KiwiSaver providers reduce their fees, and we hope that it will encourage other traditionally high charging providers to lower their fees as well.
Overseas Superannuation Schemes
How does KiwiSaver compare to similar overseas superannuation schemes?
Before composing guidance on creating value for money, the FMA commissioned research comparing KiwiSaver fees to similar investments in the UK. It was found that Kiwis were paying much higher fees than people in the UK for a similar product.
In New Zealand, the average KiwiSaver fee is 1.25% for active funds and 0.74% for passive funds. Comparing this with UK funds, the average fee for active funds in the UK is 0.92% and 0.41% for passive funds.
That was a lot to break down, but the important thing to note is that the FMA has identified that some KiwiSaver Managers may not be providing value for money on all of their products. As observed, providers have a wide range of differences with fees, transparency, returns, volatility and more.
Research by our KiwiSaver advisers at National Capital suggests that KiwiSaver fees are an important part of the KiwiSaver service, but value for money is also important.
We suggest looking at your options and seeking financial advice if you are unsure what the best KiwiSaver that option is for you. With more than 20 providers and more than 200 Funds in operation, there will be the right fund for you.
Clive Fernandes is an Authorised Financial Adviser and the director of National Capital, a financial advisory firm that provides personalised investment advice, with a primary focus on KiwiSaver.
Disclaimer: The above article is not intended to be personalised advice. It is general in nature and may not be relevant to an individual’s circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser. A copy of Clive Fernandes’ disclosure statement is available on request and free of charge.
