By Amanda Morrall
Forthcoming changes to the way KiwiSaver performance results are calculated and communicated to the public should require providers to report after tax returns, net of fees, according to the Retirement Policy and Research Centre in their latest pension commentary.
Author's Michael Chamberlain and Michael Littlewood, both of whom are affiliated with KiwiSaver provider SuperLife, say the current practice of reporting 'gross returns' (net of fees but before tax) is both confusing and misleading for investors because it doesn't show how much their fund has lost to tax.
A cabinet report on KiwiSaver performance requirements has proposed that providers publish both gross returns and returns net of tax and fees so investors can juxtapose the two, however Littlewood said gross returns should be eliminated altogether because the integrity of the data was in question and further that investors weren't served by gross returns.
"Based on the PensionCommentary's analysis, the gross returns and the tax are, in many cases, meaningless (and therefore unable to be directly compared) so why should regulations prescribe they be published?,'' he argued.
Littlewood said gross returns, if allowed, should be reported in such a way that the net returns are given greater emphasis.
For the purposes of highlighting how much is lost in fees and tax, it's been proposed (under the new reporting requirements) that two graphs be published in quarterly statements for members depicting historical annual returns and fees.''
Littlewood and Chamberlain (part owner of Aventine Limited, which administers the SuperLife KiwiSaver scheme) have argued league tables showing relative performance of KiwiSaver funds are discredited on the basis that gross returns aren't being honestly or accurately reported. Littlewood declined to name individual providers.
In their commentary, the pair argued that it is "not possible, based solely on gross returns, to work out whether a manager is relatively good or bad, nor whether the return will result in a higher or lower amount being paid to the investor."
"This exacerbates the normal uncertainties surrounding past returns which are covered usually a general warning such as "past returns should not be used as a guide for future performance.''
Littlewood said while tax confusion for investors wouldn't necessarily be abolished by scrubbing gross returns, it would at least create a more accurate picture for investors in the absence of greater information about the investment structure, its tax basis and fees.
"Even with that additional information, only a sophisticated investor could understand what the implications are to the returns they receive.''
While internationally the performance of collective investment vehicles, also known as mutual funds, are reported in gross terms, in many cases that's because tax isn't taken off until the investor's fund is withdrawn or reaches maturity at 65.
KiwiSaver is taxed along the way during the duration of the investment at a prescribed investment rate (PIR) which loosely aligns with an individual's marginal tax rate. Taxation also varies within a fund depending on how the fund is structured, what the fund is invested in and how it is managed. Effective April 1 this year, KiwiSaver contributions from employers are also being taxed. (Employer Superannuation Contribution Tax is explained here).
"Take a case where all the member's money is in an option which is invested in a tax-paid product. What, for the member, is the pre-tax return?"
Researcher house Morningstar is currently working on a model that aims to provide an after-tax performance result, as is interest.co.nz.
8 Comments
Agree with the broad points being made here i.e. the net return is far more meaningful than the gross return. It also might encourage people to make sure their PIR is at the right level when they see how it affects those return figures.
Yet they will still not reflect the performance of my KiwiSaver scheme. What is reported is very different to what my return actually is.
Current performance reporting assumes someone pays in a lump sum at X date - one month ago, three months ago, a year ago and so on. That's fine for the one-off or occasional lump sum investor.
Yet this is not how KiwiSaver works for employees. Employees are paying in money regularly - every time they are paid. Is it really beyond our ken to report retrospectively on what a members' return, net of fees and tax, would have been, assuming an average salary (say $50K p.a.), paying the statutory contributions every fortnight - going back over several periods over the last 5 years? Having those figures across all schemes would be meaningful and would expose the high fee chargers - making them more accountable.
Morningstar and the interest.co.nz table compilers will assert that the present comparative performances are useful because at least consistent assumptions are being made across all providers, even though the figures themselves will not reflect the performance of the member's fund. I really don't think that is a high enough standard to be happy with.
If you are a member of a KiwiSaver scheme, you want to see the returns published and know/trust that that's the kind of growth you will have experienced yourself. That doesn't happen at the moment.
Funny how we live in an age where computers can compute millions of figures in an instant and yet we can't show returns for $100 invested 1 year in a growth fund, 18 months ago 2 years ago etc or on a weekly basis over the same period of time or $100 a fortnight or $100 per month.
How difficult is it to cut and dice the depositors in your investment pool into groups and show the actual gains and losses. i.e. from my GMK investment (widest use of the word) I can see actual dollar values over time less contributions giving me a gain or loss.
I.e. if someone wanted to know what earnings where for regular payments into a fund then you could get an actual investor who fitted the payment and fund profile and report accordingly.
it's a two edged sword here isn't it.
On the one side this is the biggest investment the majority of the population has so if they have any real concern for their own financial well being they should make the effort to understand what they are doing. Less would irresponsible.
On the other side this isn't truly people managing their own investments, it's a sponsored scheme that only exists because of government policy. It is not unreasonable to expect the government sponsor to clean up their regulatory nest for the benefit of tax payers.
And if you're not measuring net you're not really measuring.
GMK - Gareth Morgan Kiwisaver, set the standard 3 and a half years ago for full disclosure. The philanthropist preached to the financially illetrate NZ. I have since reaped 14% in real terms (Inflation adjusted for the prop Bulls (-5%)). I will soon purchase all of Aucklands doomed rent sayers so that no one in NZ will have freedom to spend amongst themselves. Now lets all mow each others lawns for cash and count that cash over and over again until we need microscopes.
Disagree.
Personal income is gross, nobody goes around telling ya what ended up in thier pocket!
Managed/Hedge Funds all quote gross. This is how tax is calculated and % fees.
Fees are a function of perfermance. If they do better then the higher the fee. Fair enough.
Let us not make 'new' rules for kiwisaver. Sounds like more paper work for someone.
A good investor knows that Real Return (RR) = Gross Return - Inflation - Tax - Fees.
Kiwisaver is designed to encourage people who do not save, to save. It represents a bank account to them. So the only figure of any relevance is the nett. As they can change from one fund to another, the only basis of comparison is the nett. If the provider can not identify a nett figure which allows for an "apples for apples" comparison, why are they allowed to operate Kiwisaver accounts? As for a "good investor", the point is simply that Kiwisaver was never designed for them anyway. They can identify and take their own risks. But an 18 year old school leaver can not be expected to.
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