Simplicity members switch KiwiSaver provider due to concerns over linked Simplicity investments including its first-home mortgage fund

John Edwards says he originally chose to build his KiwiSaver retirement fund with Simplicity because the fees were low.

But he has recently made the decision to leave the not-for-profit KiwiSaver provider after becoming uncomfortable with its investing decisions, which has seen its KiwiSaver funds increase how much money is invested in Simplicity-linked investment funds and businesses.

Simplicity has been putting KiwiSaver members’ money into its funds for about three years, which include a first home mortgage fund open to members, private equity fund and property fund.

In May it announced it would increase how much investor money goes into Simplicity investments such as build-to-rent company Simplicity Living, with 10% of funds under its management set to be allocated to unlisted assets, up from 7.5%.

It also announced it was changing the management for $3 billion of overseas investments, shifting the funds from US investment firm Vanguard to German fund manager DWS International, a part of the Deutsche Bank group.

This has been met with concern from some investors, with Simplicity members discussing on social media that they were worried about Simplicity’s direction as a more active investor investing in associated projects and funds, rather than a passive, index tracking investor.

Edwards is one of those who is concerned about Simplicity’s investment direction. The Auckland salesperson says he’s shifted retirement funds of about $110,000 out of Simplicity after seeing Simplicity funds become among the largest investments in his retirement fund.

An investor in its conservative KiwiSaver fund, for example, would have about 7% invested into Simplicity’s first-home mortgage fund as of March 31. 

An investor in its balanced fund would have about 4.4% invested in Simplicity’s first-home mortgage fund as of March 31.

Its growth fund has two Simplicity-linked investments within the top 10 largest investments as at March 31 this year, the first-home mortgage fund and private equity fund. 

For balanced and conservative funds the Simplicity first-home mortgage fund is the largest investment in each.

“I probably joined Simplicity maybe five years ago and for the most part I’ve taken some pretty good returns, although like everyone, the last few years kind of flattened off quite a bit,” Edwards says. 

“There were probably two things that made me look to change. One was Kernel [Wealth] has a pretty good interface, and I used them for a savings account and another account, so it made sense to have everything in one place. But the way Simplicity is diversifying, they seem to be going extremely fast with the new approach, and there seems to be a bit of risk with that and I wonder whether that's going to come at the expense of investors.”

Edwards says Simplicity hasn’t done a great job of communicating what it was changing, and why. 

“It is making a few people nervous. It is a bit of the unknown.”

Home loans and retirement risk

When Simplicity launched in 2016 it made a lot of noise about being a passive investor with low fees. Massey University associate professor Claire Matthews at Massey’s business school says Simplicity needs to be “really upfront and transparent” about the changes it is making, and why they’re happening.

“It shouldn't be hard to find out what percentage is being invested in [Simplicity] own home loans, it should be something that they declare up front because of the potential conflict of interest.”

Matthews says there is a potential conflict of interest when a KiwiSaver fund manager invests in associated funds or projects. She says Simplicity must be careful to keep separation between its different businesses, including staff not socialising together.

The academic says there is a risk associated for KiwiSaver investors with the mortgage fund, and she was surprised to see 7% of the conservative fund invested into Simplicity’s first-home fund.

“Home loans are not risk free. The reality is that if you're a good borrower, you are likely to go to one of the main banks because you can get a good loan from them. You're gonna go to Simplicity more likely if you haven't been able to get a loan, or the terms in which you can get a loan from one of the main lenders is not so good. Now, that's a generalisation, and they are going to have some good customers as well … but it's definitely not risk free.”

Simplicity's most recent annual report shows it had about $53 million invested in the first home mortgage fund, $14 million in its private equity fund, and $2.9 million invested in its property fund, for the year to March 31, 2022.

It has been a fast-grower and mover in the industry, and now has about 139,000 members and more than $4.8 billion under its management.

Simplicity chief operating officer Andrew Lance says it's disappointing some Simplicity members feel uncomfortable with, or that they don’t understand, the not-for-profit’s direction.

He says everything the KiwiSaver fund manager does is in the best interest of its members. Because Simplicity isn’t clipping the ticket on money it earns from the home loans, for example, he says it can return home loan profits straight to its investors without a middleman taking a cut.

“We certainly want to be as transparent as we possibly can. The last thing we want to do is for people to feel like we're doing something that either they don't understand or that we haven't told them about.”

Lance says the returns from the mortgage portfolio from the past three years that Simplicity KiwiSavers have been invested have been “exactly in line with what we were expecting”. 

“I understand that people may feel some disquiet because we're no longer doing just passive investing in financial markets. But the only motivation for us doing anything else is if we believe we can take advantage of the fact that we are a long term investor.”

Lance says the three Simplicity funds in the KiwiSaver funds have long-term characteristics that are ideal for savers, and the return on mortgages is a far better return than it could get in financial markets.

"The mortgages we do are all on a floating rate so there's no interest rate risk in the portfolio. Our lending criteria are extremely conservative. All of the mortgages in that fund are the types of loans that a bank could do any day of the week. If anything, our lending criteria, is tougher than most banks. So it's a very conservative exposure. And it's got very little volatility. We haven't had a default in the fund at all. We haven't even had a missed payment yet. So that's why as a very as effectively a short term very stable interest generating asset. That's why it's in the conservative fund."

Switching it up

Kernel Wealth founder and chief executive officer Dean Anderson has noticed increased interest in switching from Simplicity and SuperLife members.

He says the fund manager, which has been operating a KiwiSaver fund since May 2022, had noticed an uptick in interest from Simplicity members after it announced changes to its business recently, and also when share-buying platform Sharesies hiked its fees earlier this year.

“We saw a massive surge through January and February that sort of continued.”

He says Simplicity has done a fantastic job of building out its offering, and there are a lot of people really aligned to some of the things it is doing like the build-to-rent scheme and its charitable donations.

"But I think there are also people that are looking for players like Kernel who are offering probably the most simple, pure long-term indexing. And they can fully understand what we're doing, and it's really transparently published all the holdings, and it aligns with what people are seeking, which is that low-cost index-based investment solution.”

Many of its new KiwiSaver members are like Edwards, who had a Kernel savings account and then switched his KiwiSaver, Anderson says. About 10% of its customers are switching their KiwiSavers to Kernel every month.

Still, switching remains low, he says. There could be fears of locking in losses in KiwiSaver accounts that have been impacted by Covid-19's economic punch.

The Financial Markets Authority's 2022 KiwiSaver report shows 437,315 transfers between different KiwiSaver providers for the year to June 30, 2022, almost triple the number in 2021 – but a default-fund overhaul saw 323,533 default members transferred, skewing the numbers.

InvestNow general manager Mike Heath says the KiwiSaver platform, which offers access to a number of providers including Milford Asset Management, has seen switching activity dominated by KiwiSaver bank funds and Simplicity in the first four months of the year.

He says the firm is seeing continual growth, and its KiwiSaver business had doubled in the past 12 months.

On InvestNow, investors can pick and choose funds from different providers, and Heath thinks its increasing in popularity as we mature as KiwiSavers.

"We're seven years old. So over this very, very brief history, we've certainly seen a significant lift in awareness, and significant lift in the volume of conversation around these investing methods. Technology has certainly been an enabler of that as well. So it's easy, and it's more and more commonplace to do it yourself, you know, 24/7 online."