Savers may be better off with govt fund: Treasury
Savers would be better off in a government-run KiwiSaver scheme, new data suggests.
Thursday, December 21st 2017, 6:00AM 
1 Comment
by Susan Edmunds
As part of coalition negotiations in October, the Green Party asked Treasury to do some analysis of the cost to establish and run a default public KiwiSaver fund and the potential savings benefits for average KiwiSaver members at retirement.
A scheme administered by the Guardians of NZ Superannuation was one of the Green Party’s policies this election. NZ First also campaigned on a government-run scheme, KiwiFund. NZ First MP Fletcher Tabuteau’s KiwiFund Bill has been drawn from the member’s ballot but is yet to have its first reading.
Treasury said it would cost between $200,000 and $400,000 to register the scheme, including its disclosure documents and FMA licensing.
The initial design, scoping and analysis phase would cost $1 million, it said, most of which would come from professional advisory frees. “It is possible that such upfront costs could be recovered by the fees charged to fund investors.”
Treasury said removing the requirement to make a profit would allow a reduction in fees compared to current default KiwiSaver providers. It suggested 0.3% plus $30 a year, Simplicity’s structure, was a reasonable benchmark on which to base running costs for a conservative, passive fund.
If a member joined at 18, stayed in the fund until 65 and contributed 3% of the average wage, matched by an employer’s 3%, making no withdrawals, they would have a closing balance in the government-run scheme of $965,783, Treasury said.
That was compared to $912,606 from an investment in existing default KiwiSaver conservative schemes – a difference of $53,176 or 5.5%.
The Financial Services Council said it supported initiatives to build a sustainable financial services sector.
But it was not clear what problem a government-run scheme was trying to solve.
“KiwiSaver providers operate in a competitive marketplace, and are well-regulated and of a high standard,” said chief executive Richard Klipin.
“Consequently, they enjoy a high level of both public and regulator confidence. The existing government framework for default KiwiSaver providers places a high level of accountability over the nine default KiwiSaver providers and has mechanisms for monitoring fees and investment practices. This monitoring framework covers a significant proportion of the KiwiSaver market and protects the NZ consumer.”
The Green Party also asked about the cost of introducing deposit insurance. The International Monetary Fund suggested this year it would strengthen New Zealand’s financial safety net.
Treasury said it would cost $1.50 to $3.70 per year, per $1000 in deposits, depending on how quickly the fund’s target needed to be reached.
If it wanted the fund at target in 10 years, a depositor with $100,000 in the bank would have to pay $370 a year, assuming all the cost was passed on. That would result in a fund big enough to cover one bank failing – although it would be liable for the failure of multiple banks.
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• Firstly if you look at the KiwiSaver offerings for a balanced portfolio from four of the largest banks you will see that the fee structure is in a very tight range of 1.04% to 1.17%. Hardly indicative of a competitive market and in fact suggestive of just the opposite.
• That high fees are inflicted on KiwiSavers is not surprising because, as a huge body of academic research shows, retail investors in general don’t differentiate products based on fees. This is most likely because their trusted advisors tell them that this isn’t an issue i.e. when they rock up to the ANZ, BNZ, Westpac or Kiwi Bank their advisor can only sell them the bank products and thus tells them that fees are not an issue. Similarly for those few independent advisors who actively advise on KiwiSaver the vast majority only recommend one providers products because it pays them trailing fees and those products have generally even higher fees than the banks. Despite these obvious truths, back in 2010, the then Commerce Minister, Simon Power said “I am confident that transparency along with various other standards will ensure that Mum and Dad investors can make informed decisions about whether to use a particular financial advisor and will ensure that advisers act in their best interests”. Shortly after making this statement Mr Power switched sides and became a client wealth expert at Westpac. Hmmm.
• The lack of competitiveness in the KiwiSaver market can also be estimated by looking at the extent to which the risk premium is appropriated. The equity risk premium is the excess return of global equities over global bonds. So in a US context the numbers are 6% – 2.5% = 3.5%. The average growth KiwiSaver fund has fees of 2% pa including transaction costs so that is more than half of the risk premium gone in fees. If KiwiSavers knew the impact of fees would they be happy to effectively lose most of the equity risk premium? Paul Marsh of the London Business School said recently “if returns are relatively low and you are charging 1-1.5% on a fund you are probably gobbling up half of the expected returns. I don’t think this is sustainable.” The reason KiwiSavers don’t differentiate on fees is because whilst they may know the fee they don’t know the context within which to assess whether fees are high or low.
• Last but not least we can compare the average fee of a growth orientated KiwiSaver fund at around 2.0% pa including transaction costs with the average fees paid by professional investors like the NZ Super Fund or a more competitive savings market like that of the 401(k) in the USA. The Super Fund is paying under 10 basis points pa for the bulk of its equity exposure and the average 401(k) fee for equities in 2015 was 53 basis points and it has fallen significantly since then.
That is the problem that a government run scheme is trying to solve.
As regards KiwiSaver being well regulated, unfortunately that ain’t right either. Most people i.e. 99% of prospective KiwiSavers don’t get independent advice – they get it from either a bank which chooses to only sell its own high cost KiwiSaver products or from a financial advisor who only sells KiwiSaver products that pay trailing fees and/or commission. Secondly the regulation around KiwiSaver is poor because all the fees aren’t disclosed and as I have said before that is a material omission.