KiwiSaver fees will continue to come under pressure as increased scale, new disclosure standards and competition from low-cost index providers bites, according to Financial Market Authority (FMA) chief, Rob Everett.
In the wake of the FMA’s annual KiwiSaver report released last week, Everett said providers should be able to reduce the proportional level of fees after enjoying “healthy” revenue streams “over long periods”.
“We think the market is sufficiently developed for the percentage fee to come down,” he said.
FMA analysis of KiwiSaver fees found total investment management fees were up 16 per cent year-on-year from about $220 million in 2016 to just over $266 million over the 12 months to March 31 this year. However, the investment fee increase largely reflects an influx of over 120,000 net new members during the annual period, regular contributions from existing members, along with returns of some $2.7 billion. Total KiwiSaver funds under management grew by almost $7 billion in the 2016/17 period to hit just under $41 billion as at March 31.
As the Investment News NZ (IN NZ) 10th annual KiwiSaver study reveals, proportionately total scheme costs (including investment, administration and trustee fees) dropped slightly over the year.
According to the IN NZ ‘Kings of KiwiSaver’ report published in August, the 29 live schemes collected about $380 million in fees and expenses during the 12 months to March 31.
“While that figure represents an increase of almost $58 million
(or 18 per cent) on the prior year, compared against average
FUM for the period of about $37.3 billion (taken as the March
2016 plus March 2017 figures divided by two), the total cost of
KiwiSaver 2016/17 comes in around 1.02 per cent – a discount
of 2 basis points on the previous period,” the IN NZ report says.
Everett said in a global context KiwiSaver fees were “not an outlier” but should nonetheless reduce as providers achieved more scale.
He said with KiwiSaver hitting $40 billion well ahead of expectations the regulator would’ve expected to see “a more notable effect on fees”.
“I expect more index-tracking schemes to come through that might drive down overall costs,” Everett said.
From this year KiwiSaver schemes will have to report fees in dollar amounts in annual member statements with the FMA also pushing providers to publish percentage figures.
In its annual report the regulator also berates the nine default KiwiSaver schemes for failing to engage with members stuck in potentially inappropriate conservative options.
The FMA analysis found four default schemes turned in a worse result – percentage-wise – in turning members to active choices. Default schemes are required to help members determine an appropriate investment selection.
“At this stage, we don’t think it’s appropriate to use our powers under the KiwiSaver Act to require remedial action from providers to address this issue,” the FMA report says. “But, we do think it is clear that default providers need to do more to better engage their members.”
Everett said the lack of progress in helping default members contrasts with the way many providers “commit resources and creativity” to luring members from rival schemes.
He said the FMA was “entitled to be grumpy” about the default doldrums given the lively transfer market showed providers could engage with members.
According to the latest Inland Revenue Department (IRD) statistics, just under 572,000 KiwiSaver members remain in default-allocated funds – up about 4,000 year-on-year. However, the IRD figures show more than 1.1 million KiwiSaver members were originally auto-enrolled, indicating about half since made an active choice.
Due to visit Australia soon, Everett said he planned to speak to the Australian Prudential Regulatory Authority (APRA) about its recent threat to close ‘underperforming’ superannuation funds.
He said the FMA was interested in understanding the “mechanisms and drivers” underpinning APRA’s “reasonably assertive” action.