Russell Investments NZ has called for a complete overhaul of the default KiwiSaver system that has left members exposed to unacceptable variance in returns and unaccounted-for risks.
In a follow-up paper to its recent critique of local benchmarking practices, the new Russell report notes that default KiwiSaver “member interests have not (yet) been well-served by the decisions made on their behalf”.
The study notes that since inception in December 2021, default KiwiSaver gross returns have spread across a range of almost 5 per cent from the -7.8 per cent for Smartshares to the low of a -12.6 per cent loss in the Simplicity product.
“Assuming a beginning investment of $9,000 (roughly the average balance at the time of the transition), the Default member in the worst-performing fund is already around $450 worse off than the member in the top performing fund,” the report says. “That difference, the result of random allocation, is hard to defend.”
Furthermore, the Russell study says poor transition management, the wide disparity in default fees (from the Smarthshares 0.2 per cent to Westpac’s 0.4 per cent) and ill thought-out fossil fuel share exclusions have unfairly hit default members.
“Many default members suffered weaker returns than non-Default members in 2022 as sectors such as energy and utilities outperformed,” the report says. “… we believe the various additional restrictions (relative to non-default KiwiSavers) likely ‘cost’ default members upwards of 60 basis point in 2022.”
The impact of such exclusion decisions should be quantified for investors, the study says.
Russell suggests the default KiwiSaver system would be better-served by allowing any provider to offer a compliant product built around new “simple” weight asset-class benchmarks – a key focus of the new paper.
In contrast to benchmarks used in the local institutional fund market, the report says most KiwiSaver yardsticks are hard to outperform.
“This is not to say that most KiwiSaver benchmarks are ‘good’, far from it,” the Russell study says. “But we do not believe they are easy beats in the way that many institutional total portfolio benchmarks are. In other words, they are sub-optimal, but not or the same reasons as many institutional total portfolio benchmarks.”
KiwiSaver benchmarks are a hodge-podge of indices thrown together in non-standardised recipes by different providers, according to Russell.
“The current benchmarking practices, rather than bringing clarity and transparency, simply add to the overall confusion,” the paper says. “Instead of benchmarks providing a reliable means to assess comparative performance, financial adviers and members are left to rely on often cherry-picked performance data released by the KiwiSaver managers themselves (e.g. ‘top fund over three years and three months’) as they survey the records of the various funds available to them in the market.”
Risk-weighted KiwiSaver benchmarks would be better-constructed around simple “investable” indices that all providers must report against, the report says.
“Our experience suggests that the KiwiSaver Benchmarks… will prove tough to outperform over time, even if it might be possible to construct a series of benchmarks that have higher expected risk-adjusted returns based on capital markets forecasts. In our view, near enough, would be good enough in the development of KiwiSaver Benchmarks.”
The ‘Making everyone look good bad? (part ii): a better approach for benchmarking kiwisavers (and a proposal for a fairer Default scheme)’ report was authored by Russell NZ head, Matthew Arnold.