Opinion: 'Sunlight the best disinfectant' for transparency on KiwiSaver fees, says Tower CEO Sam Stubbs

By Sam Stubbs

Fund manager fees have been under the spotlight since KiwiSaver was launched back in 2007. This scrutiny is perfectly rational, because returns to investors are net of tax and fees.

The more tax and fees applied to an investment in a KiwiSaver account, the lower the net return to the investor. The impact of deducting tax and fees – even if charged in small amounts on an annual basis - can be quite insidious, because like inflation these costs have compounding effects over time.

Even a marginal increase in costs can produce a significant reduction in investor returns over the longer term, and for most KiwiSavers that means until they reach age 65.

So fees rightly matter as an issue for KiwiSavers and it is worthwhile requiring KiwiSaver providers become much more transparent about how they charge for these costs and describe them to the public.

The end game should be to mandate a common disclosure regime for fees that enables people to compare all KiwiSaver schemes on an apples-with-apples basis when choosing between them.

At present there is not much uniformity around the way fees are disclosed and how they are charged, compounded by a lack of adequate standardisation of the terminology used to identify what the fees represent.

As a consequence there is confusion surrounding how to judge whether a given KiwiSaver scheme’s fees are fair and reasonable, and whether all the fees are properly disclosed.

This situation is unacceptable and therefore the decision by the Ministry of Economic Development (MED) to devise a common disclosure regime is to be welcomed.

Some mythbusting is required

Nonetheless, there are some misconceptions around fees charged by KiwiSaver providers that need to be resolved so that the fee debate can be focused on the key issue of proper disclosure.

'Fee gouging misconceptions'

One such misconception is that KiwiSaver providers in general must be charging high fees and gouging their members.

While it is possible overcharging could occur with the odd rogue provider billing secret, undisclosed fees, there are at least two powerful forces at work that help keep KiwiSaver fees down overall.

The first is the MED, which regulates the fees that can be charged on default KiwiSaver funds.

The MED aims to get fees as low as practicable on default funds and in turn the fee levels set for such schemes represent a benchmark for what can reasonably be charged on non-default funds.

The second is open competition between KiwiSaver providers, which is intensified by “portability”, or the right of KiwiSavers to switch their investments without penalty between competing providers.

Competition and regulation

The combination of these two forces – regulation and competition - means that KiwiSaver is a low margin, commoditised business for providers and certainly not a “get rich quick” opportunity for fund managers who enter the field.

For example, Tower Investments is a default KiwiSaver provider with some 92,000 members in its scheme and these members have an average account balance approaching NZ$6,000 each.

Despite keeping tight control on its own internal costs, Tower has only recently started to make a profit out of its KiwiSaver scheme, and that is after having offered it since April 2007.

Many other KiwiSaver providers must still be deep in the red on running costs for their schemes and it becomes a moot point how much longer they can keep going with such low margin products.

Of course, some providers may be enjoying higher margins than they are letting on, depending on how they charge and disclose their fees.

Again, mandating a common fee disclosure regime should bring that sort of double dealing out into the open for all to see.

Sunlight is the best form of disinfectant.

For more on fees, see Amanda Morrall's article on fees after the Savings Working Group argued for a single default KiwiSaver scheme to lower fees.

See also, Amanda Morrall's article on which funds charge the most fees and the least fees.