The Financial Markets Authority (FMA) has no plans to set KiwiSaver fee levels or dig in the margins as it embarks on a sector-wide value-for-money investigation, according to regulation director, Liam Mason.
Instead, the FMA has expects to hold a series of “sharper conversations” with KiwiSaver schemes – particularly fee ‘outliers’ – in the wake of its annual report on the market released last week, Mason said.
The value-for-money push, triggered in part by a Melville Jessup Weaver (MJW) UK fee comparison study published alongside the FMA annual KiwiSaver report, could end with more than talk, however.
Mason said if the fee-probe, a likely combination of internal and third-party resources, uncovers breaches the regulator may have to act.
“For example, if you say you’re a very active manager but we find you’re not then that could mean that disclosure materials have been misleading,” he said.
The FMA report highlighted the active-passive divide as a major component in the KiwiSaver fee equation, although the regulator hasn’t quite figured out how to tackle the definition.
“There are a number of different approaches,” Mason said. “We can look at transaction activity as well as performance against benchmarks.”
He said the regulatory focus on investment management style shouldn’t accelerate the trend to indexing in KiwiSaver – seen, for instance, in the recent BNZ scheme shift to a passive approach for global assets.
“Studies in overseas markets have found that a number of fund managers are not as active as they claim to be,” Mason said. “This is really about managers being more transparent about how they are active.”
While the active-passive question may lead the FMA ‘conversations’ in the months ahead, the regulator is open to other talking points with KiwiSaver providers including the costs and benefits of providing ethical investment overlays or financial advice to members.
“For those who claim the fee helps them provide other services to members then that’s entirely reasonable – but we will have the same conversation around value for money,” he said. “Providers should be able to say to us ‘here’s why my fee is reasonable’.”
However, the FMA won’t be pushing KiwiSaver providers to disclose their operating margins during the friendly fee chats, Mason said.
The annual KiwiSaver report found the average nominal member fee rose from just over $116 to roughly $132 during the 12 months to March 31, driven almost entirely by increasing funds under management (FUM) as inflows and market returns buoyed accounts.
FUM increases rather than fee hikes did explain the jump, Mason said, but the regulator was expecting more KiwiSaver schemes to cut member costs as the asset base ballooned.
“It appears the benefits of scale, at least for the larger providers, are not being passed on to investors,” the report says.
How far those fee cuts should go remain moot. Mason said the MJW study – which found on average active and passive KiwiSaver funds were 0.74 per cent and 0.38 per cent, respectively more expensive than their UK counterparts – would serve as a “starting point” to the fee conversation rather than the end game.
The MJW report itself was a little more guarded on the cross-border applicability of a study that came with a few caveats around data and UK-NZ market equality.
“In our view the initial conclusion that KiwiSaver fees are apparently higher than fees for the comparable UK market warrants further investigation to better understand this outcome and whether it can be further evidenced and if so, also attempt to understand the drivers of the difference,” the MJW analysis says.
Further talks will be scheduled.