Innovation is beginning to emerge in the KiwiSaver sector with a few providers considering the launch of “non standard structures”, according to Financial Markets Authority (FMA) chief, Rob Everett.
Everett said the FMA had been in discussions with a handful of providers about the legality of potential innovative KiwiSaver offerings such as “self select” options or splitting contributions between schemes.
He said while most of the KiwiSaver product design ideas were being cooked up within existing schemes, potential new providers were also sniffing around the sector.
As detailed by the Investment News NZ (IN NZ) annual KiwiSaver report released last month, the number of schemes has reduced dramatically over the previous few years falling to 29 in the current period from a peak of about 50. The FMA 2016 KiwiSaver annual report published last week also notes the consolidation trend.
“Some of this was driven by providers choosing not to transition to the Financial Markets Conduct Act regime,” the FMA report says.
Over the last year or so just two new schemes – the index fund provider Simplicity and the Mercer-backed NZ Defence Force (NZDF) KiwiSaver – swam against the strong tide of mergers and wind-ups.
As at March 31 this year the NZDF scheme reported over 1,100 members while Simplicity is understood to have garnered about 1,500 since kicking off in July.
Everett said overall KiwiSaver members have probably benefitted from industry consolidation with lower, scale-driven fees.
“But now some providers are starting to look at how to differentiate themselves in the market – those are good signs for the industry,” he said. “It will give KiwiSaver members more competitive choice around the edges.”
For now, however, the FMA is focusing on bringing some uniformity to the KiwiSaver mainstream with new reporting standards and a push for better member engagement across the industry.
Everett said from next year all schemes should be reporting fees in dollar amounts in a templated fashion as outlined by the Ministry of Business, Innovation and Employment last week.
“What we want to see in member statements is information they will react to,” he said. “And research suggests that retail investors react to dollar fee disclosure better than percentage figures.”
As well as dollar fee disclosure, Everett said KiwiSaver annual statements would also have to include estimated lump sum savings at retirement for each member as well as the yearly-income that figure could generate.
However, the lump sum and estimated retirement income figures, which will be based on assumptions used by the Sorted website, were unlikely to be mandatory for the 2017 reporting season, he said.
For the first time, the 2016 FMA KiwiSaver report also includes a review of how schemes were providing the required financial education services to default members.
“We intend to share examples of practices that demonstrably change member behaviour,” the FMA report says.
The regulator’s analysis of the nine default providers found Booster (nee Grosvenor) was the most successful at helping members make active choices “as a result of financial literacy efforts”.
According to the FMA report, Booster turned 22 per cent of its 10,229 default members towards active investment choices compared to bottom-of-the-table ASB, which could only do the same with 1 per cent of the scheme’s 94,870 defaulters (equating to a nominal 1,441 members).
AMP recorded the highest number of activated default members (over 11,000 or 8 per cent of total) with the remaining seven schemes scoring between 4-6 per cent on the same metric.
The FMA report also notes feedback from schemes indicated the regulator’s 2014 guidance on ‘sales and advice’ practices had restrained them from helping members with investment choices.
“We are currently reviewing our guidance, including our position on the use of incentives and expect to publish revised guidance before December,” the FMA report says. “Changes to Code Standard 8 during the year mean our guidance on limited personalised advice is now out of date and will be removed.”
Nonetheless, the FMA report says the consistently high level of transfers between KiwiSaver schemes (170,000 members over the 12 months to June 30) “suggests that the barriers to contacting members and convincing them to choose another provider are not insurmountable”.