Managers must sort KiwiSaver reporting standards

" a director should be shaking in his (her too?)boots when it comes time to sign off an investment statement or prospectus" Well yes, if you happen to be an independent director working with a management which is inexperienced or simply brings false fiigures to the board table. I wonder what value is brought to a fund by independent directors who are often there because of their name rather than for experience of the investment markets or a related discipline?

I have repeatedly stated that Kiwisaver is our next big failure. Key concerns include:

The NZ marketplace simply doesn’t have the quantum of consumers to support the extensive number of Kiwisaver offerings available. You don’t have to be Einstein to calculate that many of these schemes are currently running at a significant loss to their owners. This will present significant credibility issues for the industry over the next decade (and possibly loss of client funds unless the Trustees, Directors and watchdogs start being held accountable)

The New Zealand financial services industry is relatively new to the concept of [compulsory] superannuation savings. In most other jurisdictions, retirement savings are treated with the highest fiduciary care by the industry and Regulators alike – recognizing that this is the foundation to the industry’s prosperity. In New Zealand, we have already demonstrated a laissez-faire approach to compliance and management of these schemes and the hiccups that they have already encountered.

The New Zealand financial services industry simply doesn’t know what it doesn’t know – with much of the industry talent either doing it overseas, or maintaining a low profile. My observations of industry participants suggests that we’ll collectively keep on making the same mistakes, allowing under-resourced Regulators and jaundice industry spokespeople shape our future.

I could go on – although these are the primary challenges that spring to mind.

How can the closure of small KiwiSaver providers lead to the loss of investor funds? The investors aren't investing in the provider, the provider's shareholders are.

Kimble: How would clients react to the closure of their Kiwisaver provider?

a. They wouldn't care, they would simply roll-over into the replacement Kiwisaver provider
b. They wouldn’t care; they would roll-over into a new Kiwisaver provider
c. They would be anxious about the accumulated superannuation, tentatively rolling their proceeds into a new Kiwisaver provider
d. They would be both anxious (see c) and concerned about the financial services industry... not really fully understanding much more than having their superannuation plans disrupted

Get it? The industry no longer has the luxury of being cavalier ("she'll be right") about Kiwisaver. We lost consumer confidence with Finance Companies, and are clawing our way back to earning the trust and respect of the investing community. Most clients are likely to answer ‘C’ or ‘D’ to the questions above, with many taking a renewed interest in their financial matters (by the way – this interest will accelerate in line with their accumulated nest-eggs).

The embryonic Kiwisaver manufacturing environment at the moment is, at best a poorly run collection of investment-minded folks trying to make a buck out of gathering drip-feed assets. Most of the providers have poor compliance and governance, with many operating from little more than a spreadsheet. Whilst institutions have invested heavily into this space, the majority of providers simply don’t have the resources or the expertise to efficiently manage Kiwisaver programs… relying on the false hope that they will somehow manage to accumulate sufficient market share to make them profitable. As this hope of profitability becomes commercial reality, many of the providers will abandon their Kiwisaver ventures (albeit that more will attempt to play games with the numbers to attract more interest), unsettling an already tentative relationship between the financial services industry and consumers.

Before responding I strongly encourage you to talk with your clients and recalibrate your view of Kiwisaver through their eyes (not the eyes of the industry).

Ok. But how could investors lose their funds if their scheme closes?

Kimble - your response is indicative of the industry. Good luck

IO your responses have had nothing to do with my question. If a KiwiSaver provider fails, the money in the funds will stay in the funds. It cannot be used to bail them out. The investors would just be transfered to another scheme and for most this would be a seemless transition.

The schemes closure wont affect the value of the underlying investments. I think it is important that people understand that.

Sure if there is fraud and theft thats a different story, but it looks as if what you are saying is that even in the absence of fraud a schemes closure is likely to lead to a loss for investors. Which is wrong.

At an industry level GIPS is the right answer, as it has been designed to take into account all the problems like those outlined below.

At an investor level the right answer is that: “past performance tells us nothing about the future”. This is especially important in New Zealand because of the factors and quirks outlined below.

My pick is that stakeholders will get confused by wanting providers to calculate the return that the actual investors get (taking into account things like fees and tax). For performance comparison purposes this is pretty much a meaningless exercise, because of how tax works in New Zealand.

To demonstrate this (and support the recommendations made earlier regarding GIPs coupled with ignoring past performance), let’s compare a 10% gross return from a New Zealand share fund, with a 10% gross return from a New Zealand fixed interest fund (both off which are PIE funds). Because the New Zealand share fund only pays tax on dividend income, for an investor with a PIR of 30% the net return is likely to be around 8.2% (assuming a dividend income of 6%). In contrast the same investor would only receive a net return of approximately 7% from the New Zealand fixed interest fund.

The difference comes because (under PIE) different components of the return are treated differently for tax purposes. Comparing two diversified funds’ investment performance requires investors to make an assumption that the asset mix of both funds is the same – which is (probably) flawed at the outset.

Also – the translation of performance from gross to net will be a function of each investor’s PIR rate – coupled with the sources of the actual underlying return.

A further area of complexity comes when you contemplate that the FDR tax rules are flawed when it comes to global share funds that also hold currency-hedging contracts. This reflects the mismatch in the way that the hedging contracts are taxed (being on an accruals basis), and how the impact of movements in currency on the underlying shares is taxed (being the FDR method). The complexity relating to this increases reflecting the fact that tax is calculated at the investor level – so any attempt to fix this tends to only work for one group of investors (e.g. you can fix this for those investors on a PIR of 30% - but this solution then doesn’t work for investors on other PIRs).

As I said at the outset – for the industry GIPs is the right answer (it is sort of odd that NZ investment managers haven’t formally adopted GIPs). For the investors, remember that past performance tells you nothing about the future. If you want to compare two funds then you actually need to get in and do proper research. The last place you should start is by looking at their historical returns. Maybe having a healthy mistrust of the validity of past performance numbers at least helps to drive the right behaviours by the actual investors.