Saturday, 16 Oct 2021

KiwiSaver fee changes won’t happen until regulator acts, providers say

There won’t be any major shift in KiwiSaver fees until the regulator takes action against a provider, some KiwiSaver managers say.

On Wednesday regulator the Financial Markets Authority released fee guidance to fund managers and their supervisors over fees amid concerns that KiwiSaver members are not getting good value for money.

Around three million New Zealanders belong to KiwiSaver and have more than $76 billion invested in the scheme.

Last year’s annual KiwiSaver report by the FMA found Kiwis paid $538.9 million in fees in the year to March 31, 2020 – up 12.3 per cent on the prior year. That was despite investment returns being down 122 per cent over the year.

But while providers are managing more money every year, the FMA’s research has found they are not passing on the scale benefits to members, there is no systematic relationship between fees charged and returns and no systematic relationship between fees charged and the degree of active management a scheme has.

It wants providers to review their fees annually and prove they are providing value for money to the fund’s supervisor.

It also wants annual member fees to be eliminated and fees for advice charged to a member not the scheme so members can opt out of the charge if they are not getting advice.

Sam Stubbs, chief executive of KiwiSaver provider Simplicity and a long-time advocate of lower fees said the guidance was a good thing but he doubted it would make KiwiSaver cheaper for members.

“Not until the FMA actually disciplines somebody formally. I think they have acknowledged the extent of the problem by bringing out this report.

“In a sense it was a good thing but in another sense they have also admitted this is a problem they have failed to address. It hasn’t been solved in the 12 years [KiwiSaver has been around].”

Stubb’s firm has estimated KiwiSaver providers are in line to earn more than $717 million in fees this year and that assumes the investments do not grow in value or any membership growth.

“When you have an industry that is earning $717 million in fees there is a massive incentive not to change.

“They are going to have to be forced to change. They have been asked to change for years now and they haven’t.”

He said the industry did not fear the FMA when it came to fees.

“They are only going to fear them once they are scared of the consequences and will only know of the consequences once the FMA creates consequences.”

Rupert Carlyon, chief executive of Koura Wealth, another KiwiSaver provider, also doubted the guidance would result in change.

“I can’t see it doing anything. Until they take action against someone and that sets a really clear set of guidelines.”

Carlyon said putting supervisors in charge of checking managers’ fees would not be enough.

“I think throwing the ball to supervisors who are appointed and paid by managers is not going to – I can’t see that making big change.”

Supervisors must put KiwiSaver members’ interests first.

But Carlyon questioned whether they had the expertise to check whether a provider’s fees offered good value for money.

He said defining value for money was very difficult and questioned whether the FMA was setting itself up for an impossible task.

“How do you bring fees down, how do you do it in a way that is not just specifying what the fees have to be because value for money is such a woolly concept?

Carlyon welcomed the move to eliminate annual membership fees but said it would make it tougher for smaller providers like his to compete.

“We all have service providers. There is a pretty big fixed cost to having a customer.”

“When you onboard a client it can take from five to 10 years to get to a balance of $20k, which is when they might start to wash their face.”

“If you take out that membership fee you will have large clients subsidise smaller ones.

Carlyon said if large providers took away their membership fees smaller ones would have to follow suit or face becoming uncompetitive.

“You have got to have a level playing field.”

Richard Klipin, chief executive of the Financial Services Council, said it welcomed the guidance release on fees by the FMA.

“Clearly a focus on fees is important. But the FSC also counsels that a broader focus on other strategic issues facing the sector around innovation and growth needs to be brought into the broader equation as well.”

Klipin said a focus on good consumer outcomes was something that united the government, regulator and the sector.

“We absolutely applaud that part of the release. For now we are going to review the document in detail.

“There was a submission process and we are looking forward to both digesting the document but also engaging with the FMA in a more detailed way to make sure that the focus of the sector on consumer outcomes and focus of regulator on fees become more aligned.”

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