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.