KiwiSaver providers: Balanced is better – hold the RI
Most KiwiSaver providers have rejected the idea of applying “lifestages” settings to default funds – and most think a balanced setting is the best solution. But they're not convinced there should be any obligation to invest responsibly.
Wednesday, November 27th 2019, 6:00AM 
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The Government is running a review of the default KiwiSaver system ahead of appointing default providers.
As part of that, it consulted on a range of topics, including fees, the settings of default funds, and KiwiSaver’s role in promoting responsible investment and supporting capital markets.
DEFAULT SETTINGS
Many of the providers said default funds should be balanced, not conservative.
ASB said it had supported the idea of the funds as a “parking space” in the past and would prefer to see better outcomes due to improved customer engagement rather than a change of settings.
But it said there were problems engaging “a substantial group” of default members. Industry best efforts produced activation rates of only about 15%.
“Accepting this and that the Government may have to assist funding any shortfall for these members at retirement, we believe it is justified to move away from the view that a default fund is a short-term parking space. Therefore we support a less conservative investment mandate for the investment product.”
Kiwi Wealth said a balanced approach would give about the same outcome as a lifestages option and would avoid older people being derisked unnecessarily early.
Westpac was another vote for balanced: “While life-stages would also be a good default option if an entirely new regime was created, we believe it is very complex to transition from the current arrangements without impacting significantly on the trust and confidence of members.”
Pathfinder questioned whether the settings should be changed at all, arguing that it could remove the incentive for members to engage and move funds.
“Rather than a change of investment mandate, thought should be given to reminding investors that default funds are intended as temporary. The term ’default’ is unhelpful, and implies that it has been selected or recommended by the Crown. It gives no sense of urgency to consider a switch. The fact it is a ‘parking space' should be made clearer through the name – ‘default’ should be changed to something clearly signalling the ‘interim’ and ‘temporary’ nature of a default selection.”
AMP and ANZ were in favour of a lifestages option, though AMP noted that thought would need to be given to how that transition happened for existing members.
The providers acknowledged that first-home buyers would need a more conservative approach than others in their age range but said that they tended to be more engaged with their savings, anyway.
Milford said people could be asked in the sign-up stage whether they planned to use their money to buy a house.
FEES
Most providers said members were getting value for their KiwiSaver fees, particularly in default funds. They said more economies of scale should be expected.
“We agree that members should expect fee reductions as providers achieve scale benefits. However, it is important to note the variable nature of many costs, for instance overseas manager costs. Exposure to offshore markets is a key aspect of a diversified investment strategy,” ANZ said.
ASB had a similar sentiment: “We agree that members should expect fee reductions as providers achieve scale benefits. However, it is important to note the variable nature of many costs, for instance overseas manager costs. Exposure to offshore markets is a key aspect of a diversified investment strategy.”
They rejected the idea of the Government setting fees – except for Simplicity, which said there should be a standardised default fee.
But MyFiduciary said KiwiSaver was often not providing good value for money.
“That is, in our view fee levels are generally too high for the types of strategies that most schemes employ. This is not to say that lower fees necessarily offer better value. Fee levels could arguably be higher, but still offer good value for members, if strategies employed included a higher allocation to private markets and ‘alternatives’ in general.”
RESPONSIBLE INVESTING
There was division over KiwiSaver’s responsible investment obligations. Submitters had been asked whether default funds should have a responsibility mandate.
ASB said it would not be appropriate for the Government to direct how KiwiSaver funds should be invested.
“Currently, investing with a preference for investments that make a positive impact on society or the environment means a fund will be less diversified in the investments it can pursue. This means it may forego some potentially profitable opportunities on ethical grounds.”
Milford said a basic level of responsible investment was appropriate.
Pathfinder argued that setting a single set of values was controversial and that opting only for exclusions could increase volatility.
MyFiduciary said KiwiSaver providers had a fiduciary duty to consider responsible investment and report on their RI activities.
"We assess that most providers still have a lot of ground to make up to integrate environmental and social governance (ESG) into their investment process."
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Comments from our readers
“This will warrant further work,” Mason said.
“We’re also seeing some gains by new entrants who have come into the market with some challenging lower-cost fee models, and that’s great to see. We want competition to do as much of the work as possible, rather than the regulators having to try to influence that.”
Then there is the volume component on top. When the KS provider has relatively little in the way to direct fees and the underlying fund managers have a reasonable whack of the margin returned, where is this money supposed to come from to reduce fees?
Added to that increased regulation requirements, advertising and distribution costs, increase in rent, utilities and wages, there's a lot that is getting in the way of the FMA expectations that is not discussed.
Though as John has pointed out, using intern and volunteer labour is a possible way around this. But again who is working for whom, and is this the right thing to be doing? Free labour for a fund manager to provide higher returns to it's clients. Then who's paying the living costs of the labour?
And then there's the last 10 years or so for a number of providers, where they have invested capital heavily into the business on the basis of the long term business growth and margin. Is the FMA suggestion that having a return on that investment is less important than the return to the client? Particularly if there has been an operating loss for many years as the fund was built?
Our companies act places the shareholder above the client in companies, the financial services legislation says put client's first, but there is not any measure specified as to how the margin of the business is distributed from a regulatory perspective. That is at the discretion of the directors of the company.
There is the investment statement where the operation of the business is laid out, and this discloses, or should disclose, how this works. And then it does become buyer beware or adviser recommended.
It's rather trite to say fees should be lower when costs are rising and little else other than international fund operations are being considered.
And while on that subject, given a larger market with a close client pool, what metrics for those funds are substantially less than the NZ funds because of our high cost of market access for say advertising. It costs a lot more to cover 4 million people with billboards than it does in downtown London or Dallas.
Communication costs, and other location based advantages for the more competitive fund that the NZ fund is expected to wear... There's may ways to skin a cat, the approach to skin the leg and judge the rest from that is very shortsighted.
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MyFiduciary, as I am one of the earliest Accredited Investment Fiduciaries, I think it’s a stretch to suggest providers have a duty with RI. If the time comes when Government dictates what providers can invest in on behalf of members, it will be time to vote for the opposition. Oh wait I forgot, there isn’t one. Perhaps with one lonely exception in Epsom.