By Amanda Morrall
Default KiwiSaver providers, impugned by earlier reports that suggested they were siphoning 42% of investor's returns in the form of fees, have been vindicated by new calculations which tag the average fund fee at roughly $1 a week, comparable to what many bank customers pay for a saving account.
The Investment Savings and Insurance Association, in a 'briefing note' released Friday, said contrary to the perception that many KiwiSaver members might have be left with that default funds were among the most reasonably priced managed funds in Australasia.
The ISI estimated the average investor in a default KiwiSaver fund was paying their fund manager less than $60 per year to manage their retirement savings, a cost that included investment management, trustee expenses and a whole slate of other administrative and compliance charges associated with running the scheme.
As account balances increased with time, members could expect to pay even less in fees, the ISI argued, declaring KiwiSaver "the most successful public private partnership in New Zealand's recent history.''
Default KiwiSaver members, who make up 24.5% of the more than 1.7 million New Zealander's invested, have been well served by the scheme the industry group asserts in its note.
"The very low risk investment strategy and the default funds have served KiwiSaver default fund investors well over the last four years, the most challenging investment environment in 80 years following the Global Financial Crisis. "
"The current fees charged by default providers are low by Australian standards given that New Zealand fund balances are much smaller than for similar schemes in Australia. This is similar to a bank account where the administrative fees are the same regardless whether the account has $100 of $10,000 in it.''
A controversy erupted a few weeks ago over default fees following the release of the new Financial Markets Authority's annual report on KiwiSaver.
Based on figures contained in the report, non-default provider SuperLife's Michael Chamberlain suggested fund managers were skimming 42% of the returns earned on the investment. (See Otago Daily Times story for details).
The ISI quarrels this claim, pointing to a "number of inaccuracies within such an analysis.''
It turns out the 42% fee grab accusation didn't take into account that 20.8% of that included tax paid by the funds to Government.
The figure was also distorted because it included the fees charged by default providers across a whole suite of funds outside of the default option including growth and aggressive classifications which typically have above average fees.
In further defence of default funds, the ISI noted the low balances of the many KiwiSaver default accounts, making fixed fees seem disproportionately high, particularly for those who aren't actively contributing to their savings.
It is estimated that 45% of KiwiSavers in default funds are non contributing, a trend that is growing each year.
In 2009, non-contributors were estimated at 23% of membership. The following year, the number almost doubled to 40%. For the year ending June 30, 2011 it grew to 45%.
While members may not be adding to their accounts, they continue to pay fees each year.
The annual ticket clipping may not endear KiwiSavers to their provider however the ISI highlights the fact that KiwiSavers, while locked in till 65, have the freedom of choice.
"Any KiwiSaver investor unhappy with the fees being charged by their provider has the option of moving to another provider,'' it states.
While fees take up a fair amount of air space, the ISI maintains that investment style and returns are what count most.
"KiwiSaver do not invest in order to pay fees but to increase their long term net wealth. In the longer term investment style and returns matter more than fee structures in terms of net investment earnings achieved and the final account balanced delivered at retirement.''
As for the Green Party's proposal to raze costs by having the New Zealand Super Fund serve as a 7th default provider in 2014, and subsequently serving as a wholesale provider for the public thereafter, the ISI was as critical as it was doubtful.
Breach of agreements with the existing default providers would likely lead to them asking for compensation, the ISI predicts.
In addition to challenging whether the investment style of the NZ Super Fund was consistent with the long-term goals of KiwiSaver, the group also points out the Green's failure to take into account the numerous legal, administrative and compliance costs that would need to be imposed on the existing architecture.
That would include "significant investments in registry, custody, trustee services," on top of "mandated retail reporting, prospectuses, annual reports, compliance obligations, call centres, websites and direct mail facilities" the costs of which would necessarily be recovered through a higher fee structure than what is currently in place.
It said the default fee of 0.4% proposed by the Green Party is consistent with what other default providers are already charging.