As we know, in April 2021 the Financial Markets Authority (FMA) released guidance for KiwiSaver scheme providers. So, what does this mean for you? Let's find out!
It was clear the FMA was confident that some schemes were not creating value for money and why wouldn’t they? KiwiSaver providers continue to make record profits from fees every year. In 2019, providers racked in $479.8 million, and in 2020 when members lost over $820 million in returns, fund managers earned another record profit of $538.9 million. So after this guidance came into place, have any providers made changes?
First, let’s take a look at what makes a KiwiSaver fund, the types of fees you could be charged, the fund options you have and what value means in relation to these.
Types of Fees
There are a few types of fees that providers charge their clients and it is important to understand what these mean for your investment journey.
A lot of funds charge a set fee, commonly called an ‘administration’ or ‘members’ fee. These are a set amount, no matter your balance or level of risk your KiwiSaver is in. These types of fees can be more transparent, because you will be charged the same thing 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.
Juno has recently changed its fee structure so that all members pay the same fee of $8 per month or $96 per year. They do not charge any other fees and their reason for this is to create transparency in their investment and create a fair playing field for all investors.
There is a downside of this, however. By paying one fee no matter your balance, people with lower balances are disproportionately charged. Although Juno does break down their ‘one fee’ structure more than this, the main point stands.
Another important point to make with having only one set fee is that it takes a lot of risk off the fund provider. Juno is setting themselves up with a set income every month, no matter how their funds perform. So there is a question of what is driving them to try to create the best performing funds? Why would they go out of their way to try to create the best returns, when their income is set in stone, regardless of how much work they put into their funds.
Percentage based fees
Another type of fee, which most KiwiSaver providers currently charge, is a management fee. This is commonly 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.
The downside of having a fee that is based on a percentage of your overall fund balance, is that it is harder to know how much in fees you will be paying. Your fee will also be changing as your balance changes, so if you calculate your fee today, in a year's time it may be quite different.
The positive side of a percentage based fee however, is that it means that your fund provider is taking on some of your risk by saying that they only get paid from your fund balance. If they made terrible investment decisions and everyone's balance began to decline, their income would also begin to decline. This creates a drive to create well performing funds, so that they earn sufficient income.
BNZ KiwiSaver funds are an example of using this management fee. Their fee ranges from 0.3% for a cash fund, up to 0.58% for their growth fund. When comparing this fee to the average fees charged, BNZ actually offers very low fees to the New Zealand industry average of between 0.74% - 1.25%.
The third type of fee worth mentioning is a performance fee. Again, this would be percentage based and only applies 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, the performance fee would be applied. These types of fees are mostly common in growth funds, where there is higher volatility and the performance percentage charged is usually around 0.1%.
It is positive news if your fund is outperforming the benchmark, this means your returns are above and beyond what is expected of that type of fund, in terms of its volatility and growth asset make up.
The negative side of this however, is that it creates an additional barrier in terms of transparency of fees. New Zealanders already struggle to understand how much they are paying in fees, we don’t need another fee to cloud the fine print even more.
Active and Passive Funds
Before we take a closer look at changes from specific schemes, it is important to understand why different types of schemes are able to 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. In return, active funds should be beating the market index rate - i.e. the extra fee you are paying is made up by seeing higher than average returns.
Active funds may also be able to provide more than just the possibility of higher returns. It is common for actively managed funds to also offer other financial services such as access to financial advisers, financial planning software, and research on ethical investing. For some, these additional services make the higher fee worthwhile, regardless of the returns on their investment.
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 market index rate - i.e. the lower fee you pay is due to the lower returns than an active fund.
Why not regulate the fees these funds can charge?
The FMA has regulations set around ensuring that value is provided for a customer. It would be difficult to enhance this regulation even further due to the point of differences that funds offer. Some funds have the ability to remove their fixed administration fee, whereas others rely on this fee to pay their fund managers. Although the FMA has not set regulations on the fees that providers can charge, the KiwiSaver scheme rules state that a scheme must not charge a fee that is unreasonable and this is where their most recent guidance has built from. What is reasonable?
Active and Passive funds within KiwiSaver
The FMA have had their eye on Managers and their relationship with the activeness of their fund and fees charged, and they found that there was no relationship between these.
Some actively managed funds charged relatively low fees and some passively managed funds charged relatively high fees. It was found that active funds can be managed without the need of high fees and that some providers are charging high fees without offering an active fund.
Overall, it was concluded that there were some providers who offered poor value in terms of activeness and fees charged. They also found from their annual survey that in KiwiSaver, high fees is not necessarily translating to high performance.
Does paying a higher fee give me higher returns?
I don’t know about you, but if I was paying a higher fee, I would want some reward for that, whether it be higher returns, more ethical investment choices, etc. Taking a look at the below graph, we are looking at all KiwiSaver funds comparing their fees to their returns. It is showing us 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. Correlation tells us the strength of the relationship. Therefore, this correlation of 0.2 tells us that 2 in 10 times when comparing a funds fee with its returns, a higher fee will give higher returns. In our opinion, those odds seem disappointing.
(Source: FMA KiwiSaver Tracker)
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 Managers allowed to charge a higher fee when they are not providing more value for the money we pay them?
(Source: FMA KiwiSaver Tracker)
How does KiwiSaver compare to similar overseas superannuation schemes?
KiwiSaver vs UK
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 Kiwi’s are paying much higher fees than people in the UK for a similar product. In the UK, an annual superannuation charge of over 1% is considered expensive. Here in New Zealand the average 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. This again demonstrates that some KiwiSaver providers are charging fees higher than is necessary as UK funds are demonstrating that lower fees are still profitable for fund managers, as are some low fee active funds in the KiwiSaver scheme.
KiwiSaver vs USA
You may be thinking, the UK is just one country, do they have unusually low fees? Let’s find out!
The USA famously holds the 401(k) superannuation scheme. Members of this scheme can expect to pay an average of 0.41% per year in fees. This is across both active and passive funds, making it a lot cheaper than what New Zealanders are paying.
KiwiSaver vs Australia
Bringing it closer to home, the Australiansuper is another similar scheme. Their members can expect to pay between 0.88% and 1.24% in fees per annum. This is a lot closer to the fees that Kiwis are paying.
A couple of possible reasons for this may be the similar rates of minimum wages between NZ and Australia, whereas the USA and UK have minimum wages that are a lot lower. Our currency is also very similar to Australia, whereas the US and UK both hold stronger currencies than us. Another possibility could be that the UK and USA have much larger stock markets than NZ and Australia. All of these could impact the profitability of superannuation scheme managers in some way which may explain why NZ and Australia have similar fees.
Are KiwiSaver Managers starting to reduce their fees?
Although returns are not guaranteed, people investing in KiwiSaver are investing for their future. A fundamental concept of investing is that you are not consistently losing money. Therefore, if a fund is providing negative returns after fees, there is a serious problem and this is not ‘creating value’ for their customer.
We are not going to delve into all providers today, however we have seen some notable changes since April’s announcement that we will touch on.
Changes in the banks
Firstly, Westpac announced that they would be removing their $12 administration fee, and also reducing their fund fees. For example, their growth fund fee will drop from 0.8% to 0.55%. If you had a 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 or ANZ have suggested that they will be removing their administration fee, but maybe Westpac’s move will encourage the other major banks to reconsider.
Changes to Active Funds
Managed fund providers, Milford Assets and Fisher Funds have also recently made a move to reduce or remove their administration fees. Milford assets first made a move back in December 2020 to reduce their administration fee from $36 to $18. Then from July 2021, they have removed this fee all together. Fisher funds have since followed, reducing their $36 administration fee down to $23.40. Then from September 2021, they have reduced their fee again, down to $18. It’s great to see large providers making a move to reduce their fees, and we hope it encourages other traditionally high charging providers to think about lowering theirs as well.
What does all of this information mean?
That was a lot to break down, but the important thing to note is that the FMA has identified that some Managers may not be providing value for money on all of their products. As we saw above, providers have a wide range of differences with fees, transparency, returns, volatility and more. We encourage you to look into your provider and specific fund and contact them if you are concerned about any aspect of your fund. With around 30 providers and 300 funds to choose from, there is bound to be the perfect fund out there for you. If you are needing help with personalised advice, we encourage you to take National Capital’s KiwiSaver Healthcheck. We can help find the right fund for you!