KiwiSaver providers question Greens' plan to reduce feeload on retirement savings investment; Say regulators need to address "shocking" disclosure standards instead

By Amanda Morrall

The Green Party's plan to raise fees on KiwiSaver by using the New Zealand Super Fund as a conduit for investing is being questioned by providers, default and otherwise, who suggest the root of the problem is poor regulation and lack of transparency.

Fund manager Brian Gaynor, of Milford Asset Management, said until regulation in New Zealand was improved to address the thorny issue of disclosure on fees, KiwiSaver members would remain in the dark.

"Disclosure in New Zealand is shocking,'' said Gaynor, challenging the Greens' claim of fee taming through the creation of a wholesale government default provider run under the auspices of the New Zealand Superannuation Fund.

Gaynor said while fund managers have been coping it over high fees, banks were the one's charging "the big fees."

"The banks make far, far more money than fund managers.''

Gaynor also cast doubt on whether the New Zealand Super Fund, given its "very high risk approach to investing" would be a good investment fit for Kiwi investors who tend toward the low risk profile.

David Beattie, joint chief investment officer for Grosvenor Financial Services, expressed a similar view, arguing the plan was ill conceived given the investment objectives with KiwiSaver.

"The trouble with the New Zealand Super Fund is that they have their own long-term policies to adopt which are consistent with what a New Zealand Government funded liability is looking to manage. So they are definitely matching asset liabilities relative to what the Government's is doing and that's a different proposition to managing money for individuals for retirement.''

"The NZ Super Fund is able to take a much more aggressive approach to illiquid types of investments so they can really invest in infrastructure and that sort of thing. New Zealanders right or wrongly in retirement savings programme want more flexibility and liquidity."

'People deserve choice'

Beattie said Kiwis also deserved to have choice, which would be dramatically reduced by folding existing default funds into a public option.

"I'm a big proponent of competitive long-term wealth management delivery. It's putting all the eggs in one basket with NZ Super. I think people should be free to choose.''

The Greens, as part of an election platform on savings, are proposing to do away with default funds offered by private providers and to use the NZ Super Fund instead. Co-leader Russel Norman suggests KiwiSavers would benefit substantially from such a move given the Financial Markets Authority claim that members have lost roughly 43% of their investment returns to fees. (See more here by Bernard Hickey).

The Greens said while the party couldn't guarantee its proposed public KiwiSaver fund would be any safer than any other provider, they pledged fees would be lower.

"Our public KiwiSaver fund would have no more implicit guarantee than any other provider. What I can guarantee is that by reducing KiwiSaver fees and costs significantly, New Zealander's nest eggs will grow considerably.''

Norman said fee-cutting superannuation reforms adopted by Australia are projected to increase a 30-year-old saver's fund by A$150,000 over the period until they retired.

'We're not fleecing 'em'

But many providers reject the claim KiwiSavers were being fleeced on fees.

Beattie said if fees seemed disproportionatly higher it was because earning rates had been negatively impacted by the global financial crisis.

"The reason fees represent half the earnings is because the earnings have been so low but those earning rates are not normal and won't be going forward. If they continued to be then the whole country and world is buggered,'' he said.

A spokesperson for OnePath said the Financial Market Authority's annual review of KiwiSaver condemning default providers on fees was both misleading and questionable.

The Financial Markets Authority's report, released this month,  highlighted the six default providers having charged a total of NZ$43 million in fees on fund earnings of only NZ$104 million - a fee ratio of 42% whereas non-default providers charged NZ$121 million in fees, or 28%, on fund earnings of NZ$432 million. (See New Zealand Herald story detailing their conclusions here).

Several parties, including research house Morningstar, have questioned the validity of those numbers given disparities among providers in how fees and expenses are reported.

As a percentage of the net return on investment across all its funds in the OnePath default scheme fees were closer to 17%, said a spokesperson for the provider also noting that individual investor's fees were all unique and varied according to the size of the balances and returns.

For example, on its conservative fund, which delivered returns above 6%, fees had a 1% impact over the last nine months  for the 12 months to March 2011.

Converting the New Zealand Fund into an individualised savings system, such as offered by KiwiSaver, would necessarily incur a whole raft of changes that would in all likelihood result in a comparable fee, OnePath contends.

Greater interest welcomed

John Body, managing director of ANZ Wealth  (responsible for four schemes including OnePath's default scheme, ANZ KiwiSaver, National Bank KiwiSaver and SIL KiwiSaver schemes) said he welcomed the heightened interest on retirement savings and KiwiSaver and the debate over fees.

Body said the Ministry of Economic Development's upcoming regulatory reforms would bring clarity to the issue of fees once and for all.

"We fully support the increased transparency and standards that these new regulations will demand for all providers. In the current design of the scheme, with six default providers and a wide range of other choices for consumers, there is sufficient competition to enable investors to make an informed choice about where to invest their money."

Norman echoed the view.

“One of the first tasks of the new Financial Markets Authority will be to ensure KiwiSaver providers are reporting their fee and cost structures in a fully consistent and transparent way. The Financial Markets Authority can also issue clear parameters for performance-based fees, such as ensuring they’re measured on an after-tax after-cost basis, and include claw back provisions to recoup poor performance.” 

Savings Working Group member Paul Mersie said it was " nice to see something that the SWG thought worthy at least of serious consideration being picked up" by politicians.