More regulatory guidance and a stern talking-to for a few KiwiSaver providers are in the offing as the Financial Markets Authority (FMA) digests the findings of its just-published ‘value for money’ report on the sector.
Liam Mason, FMA director regulation, said the new report – ostensibly a review of active and passive investment among KiwiSaver managers – would set the stage for “conversations” with a few outlier providers.
“Firstly, we’re going to follow up with a few individual schemes,” Mason said.
As reported here in July, the FMA report, carried out by Auckland consultancy firm MyFiduciary, found most KiwiSaver managers were true-to-label based on investment style.
But, based on a bespoke ‘activeness’ score created by MyFiduciary, a handful of active-style schemes – notably Westpac, Aon Russell and SBS Lifestages – appeared more passive-like on the FMA gauge.
Mason said the regulator would have some please-explain meetings with those schemes that deviate significantly from the norm across the three variables covered in the report: claimed level of active management; the measured ‘activeness’; and, fees.
Aside from dealing with the special cases, the FMA would also issue general industry guidance in light of the report’s finding that there was no broad link between activeness and fee levels.
“We expected to see a correlation between investment style and fees but there wasn’t one,” Mason said. “We will have a look at disclosure of investment style – whether schemes are passive or active, it should be clear to consumers what they’re buying.
“We might need to give some guidance on how that ought to be done.”
Overall, he said KiwiSaver members had yet to experience the same falling-fee benefits of scale as seen in other jurisdictions. While KiwiSaver fees have been static for the last couple of years, with some reductions since last September, Mason said there was scope for further movement.
“Since we started talking about value for money in KiwiSaver last year, the upward trend in fees has slowed,” he said. “And that suggests we’re on the right track in going on about fees.”
However, the single-minded focus on fees could dumb-down KiwiSaver, according to Clive Fernandes, founder of robo-advice firm National Capital.
Fernandes said by targeting fees alone, the FMA sends the signal that ‘cheap passive is best’.
Most importantly, he said KiwiSaver members could miss out on financial advice that has the potential to improve long-term returns well in excess of any higher fees.
“There’s a much bigger problem in KiwiSaver than whether members are in active or passive funds,” Fernandes said. “Just having advice to move from a conservative to a balanced fund, for example, could lead to much better outcomes for members than whether they paid a few basis points more or less in fees.”
Indeed, some of the higher-priced KiwiSaver schemes such as NZ Funds, Booster and Generate include an advice fee (covered as a distribution cost under scheme general administration expenses).
Mason said all KiwiSaver providers should be able to explain how they their fees – including if financial advice is part of the package.
“Advice is a big one,” he said, that might justify higher fees.
“We just want to ensure that everything providers promote that they are doing for their fees, they are actually doing,” Mason said. “Every provider should be willing to explain how they earn their fees.”
The MyFiduciary report does touch on the range of underlying service costs, including custody and administration, that KiwiSaver providers must bear. And while providers can attribute some of their fees to these underlying expenses, the report argues the regulator could benchmark these costs to flush out the true impost – at least for default funds.
“Given the privileged position of Default Providers, and the importance of KiwiSaver overall to New Zealanders’ retirement incomes, we believe costs should be more transparent and open to scrutiny,” the report says. “Part of this could involve periodically benchmarking all material costs in the Providers’ supply chain so that the total fee can be tested to ensure that Providers are earning a fair and not excessive rate of return on their equity.”
Chris Douglas, MyFiduciary partner and report co-author, said such a cost-benchmarking exercise was “feasible”.
“It wouldn’t have to get too explicit about line items but it would be good to understand broad-based costs across the industry,” Douglas said.
Mason said the FMA likely wouldn’t benchmark KiwiSaver costs in the immediate future.
“We’re not rushing in that direction,” he said. “From the consumer perspective [KiwiSaver scheme costs] are not their problem. They’re just concerned about what they buy, and what they got.”
Douglas said while the MyFiduciary study was not the final word on KiwiSaver ‘value for money’, or the active-passive debate, it did serve as a conversation-starter for the FMA and providers.
Talks are ongoing.
