The $440m KiwiSaver honeypot for fund managers

Investing

Over five years KiwiSaver members have paid close to NZ$440 mln in fees all up to providers and related parties

25th Oct 12, 5:05am by Amanda Morrall

By Amanda Morrall & Craig Simpson

KiwiSaver accounts, which have swelled to more than NZ$12.7 billion since 2007, have seen providers and related parties rake in almost NZ$440 million of fees, which averages out at NZ$87.5 million a year over five years.

The fees, reported in official KiwiSaver documents, were spread among more than 50 registered providers managing over 200 funds on behalf of the 1.9 million KiwiSaver members enrolled as of March 31 this year.

Some of the 50 providers as registered with the Financial Markets Authority (FMA) are restricted schemes and are therefore only available to staff or a specific demographic of society (e.g. lawyers or medical professionals).

The payments, including administrative costs, investment management fees, trustee fees and "other scheme expenses" totaled over five years and then expressed as a percentage of the closing funds under management, equate to approximately 3.4% (as at 31 March 2012).

The table below shows the growth in fees as balances have grown over time.

Expense type	2008 ($mln)	2009 ($mln)	2010 ($mln)	2011 ($mln)	2012 ($mln)	Total ($mln)
Administration fee	3.944	21.407	37.531	52.419	56.641	171.943
Investment management fee	0.626	9.350	25.616	40.416	69.209	145.216
Trustee fee	0.095	0.683	1.589	2.540	3.187	8.095
"Other" scheme expenses	1.503	5.162	28.576	68.465	8.436	112.142
Total fees	6.168	36.602	93.312	163.840	137.473	437.396
Closing balance at 31/3	701.718	2,654.4	5,852.4	9,186.4	12,735.3	12,735.3
Fees as % closing balance	0.88%	1.38%	1.59%	1.78%	1.08%	3.43%
Fees as % of average balance for year*	1.76%	2.18%	2.20%	2.18%	1.25%

* The average balance is calculated using the opening and closing balances in each time period.

Please note that our analysis on the fees paid to the various KiwiSaver scheme providers doesn't make any allowance for payment of the Government subsidies during the period 2008 - 2010, which according to Inland Revenue reports found here totaled NZ$58.5 million.

The most recent annual report for KiwiSaver was released earlier this week by the Financial Markets Authority. While it showed fees paid in the most recent reporting period were NZ$129 million, interest.co.nz decided to included "other scheme expenses" as we believe this could also be attributed to members. Interest.co.nz was also curious to know the cumulative effect of fees, so went back to 2008 (the first report available) to tally up the fees to date.

So how have the fees you've paid impacted your KiwiSaver returns?

To see the long-term effect of fees on your KiwiSaver returns, check out our fee calculator here. And to see how much you are paying in fees on your fund, and compare that to similar funds, go to our find your fund section here.

Links to FMA and Government Actuary reports are provided below:

For year ended June 2008

For year ended June 2009

For year ended June 2010

For year ended June 2011

For year ended June 2012

Nearly half of members aren't contributing

In the FMA's commentary section, in the most recent June 2012 review, it is noted that close to half of the enrolled members aren't contributing to their accounts. Non-contributors are counted as those who haven't paid into their accounts for a period of two months or longer.

Even though members stop contributing to their accounts, they will continue to pay fees.

According to the FMA, a significant number of the non-contributors are aged under 17. Self-employed members make up another big chunk, although many of them wait until the end of the tax year to make lump-sum contributions. At the end of March, more than 312,000 members were kids under 17. Interestingly, this age group (while not contributing to their accounts) accounted for the highest number of members having actively made a choice about which fund to be in. The decision, presumably was made by their parents or a provider at the time they enrolled.

Hughes' concern

Members between the ages of 18 to 25 made up the biggest numbers in the default group. Across the range of funds and providers, close to 25% of members remain in default funds, a point of concern for the FMA's CEO Sean Hughes.

Hughes, in a press release that accompanied the annual review, echoed industry concerns about members languishing in default funds when they had a choice to be in a different risk graded type of fund producing potentially different returns.

"Our desire is for members to make decisions based on their life stage, age, and personal circumstances which will leave them in the best financial position when they reach NZ Super age,'' said Hughes, imparting an unlikely opinion on the superannuation scheme.

While default funds (with the highest weighting of cash and fixed interest assets) have, on average, out-performed other fund types through the global financial crisis, providers have repeatedly raised concerns about younger investors potentially shortchanging themselves on higher returns through more growth oriented funds (that is those with a higher allocation of shares and other growth assets).

ANZ Wealth, the country's biggest provider in terms of funds under management, earlier this year made a pitch for default funds to be converted into "lifestages" funds that would automatically adjust for risk according to age. By their estimates, a 25-year-old (over a 40-year period) could end up NZ$72,000 worse off as a result of being left in a default fund. For more on fund types in KiwiSaver read this.

For more on lifestages fund read this.

For detail on average asset allocation among the different types of fund on offer read the FMA's full report here.

Prudential regulation 'missing'

Hughes said KiwiSaver has become a key focus for the FMA, which recently released a new guidance note on the sales and distribution of KiwiSaver schemes. (See also Amanda Morrall opinion piece on why you should care).

Hughes said new disclosure requirements, due out early next year, would also make it easier for investors to compare the performance of different funds and make more informed decisions about their retirement savings scheme. Hughes told interest.co.nz earlier this year that prudential regulation of KiwiSaver providers was the regulatory "bit missing." However, Commerce Minister Craig Foss said the Government had no plans to introduce such regulation.

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16 Comments

by Stephen Hulme | 25th Oct 12, 9:31am 1351110666

When the Govt is in on scams, we are all screwed. (And they are totally and guiltily).

Certainly S-L - latest proposal by a peer in the UK sets out his self serving notion - I am sure many here are angling for the same as the pension pot disappears under the stress of fees and low interest rates.

...Lord Bichard. He is a genuine, fully paid-up Sir Humphrey - a career mandarin. Bichard was a permanent secretary in Whitehall, until his retirement at the age of 53 in 2001. His entire career has been spent in local Government and Whitehall as a civil servant, and then among the fat-cat quangoistas. He is one of the lucky recipients of a scam whereby circa 16,000 of his ilk had their pension entitlement doubled….but nobody was told, and thus there is no budget to fund it. Lord Bichard’s index-linked pension is in excess of £120,000 per annum. Last night, this man told the BBC that retired people should be encouraged to do community work….or face losing some of their pension.

by Andy Rodgers | 25th Oct 12, 9:39am 1351111168

"In the FMA's commentary section, in the most recent June 2012 review, it is noted that close to half of the enrolled members aren't contributing to their accounts."

So that's nearly 1 million people who have received the Governments $1,000 dollar gift and that $1 billion of taxpayers money is being used by the Kiwisaver providers to extract fees on non-contributing accounts. What happens when these accounts have zero funds in them? There must be an enquiry into this shocking abuse and waste of public money.

by Stephen Hulme | 25th Oct 12, 9:56am 1351112205

There must be an enquiry into this shocking abuse and waste of public money.

There aren't enough days in the year, the abuse is systemic in all facets of NZ life.

It has to be stopped at source - Entitlement to taxpayers money has to be socially unacceptable to all. - fat chance -right?

by Ms de Meanour | 25th Oct 12, 6:06pm 1351141614

It may not be as bad as that - note that their definition of "not contributing" is people who haven't made a contribution for two months or more. There may well be people who put in a $1000 once a year so as to maximise the Government's contribution. Also - is it clear whether "enrolled members" means all members, or just those who were auto-enrolled (ie, does not include those who joined direct)? because if it's the latter, then the actual number involved won't be as high as a million.

Who exactly is being accused of "abuse" here? It's not unreasonable to charge fees on an account that the account holder isn't contributing to - it still costs a provider money to manage it. Or are you referring to the account holders? in which case, the main victims of their behaviour are themselves, not the taxpayer. The taxpayer pays $1000 for each KS account opened, whether the account holder then contributes to it or not.

by SmoKey | 25th Oct 12, 10:11am 1351113117

Watch out for the markets tanking and the retirement savers taking another bath...bound to happen several times in the next few decades....

by ngakonui gold | 25th Oct 12, 10:32am 1351114364

the words of a song by hot chocolate come to mind

EVERYONES A WINNER BABY THAT'S FOR SURE

Unfortunately some are. bigger winners than others now thats for sure

by Gummy Bear Hero | 25th Oct 12, 12:30pm 1351121407

Gareth Morgan warned us all , when Michael Cullen established KiwiSaver , that this was a grand scheme for fund managers to clip the ticket , and to get a free ride for doing very little ..... he described Kiwi investors as being corralled into the waiting arms of the rapacious fund management industry ...... fees are the name of the game , not performance ...

...... and he should know , 'cos he provided a prime example of how to ride that gravy train , and then to cash out , and abandon your clients to someone else ...

by Xcellent | 25th Oct 12, 5:18pm 1351138732

Great point. And with a 1% fee on his Conservative Fund (most funds are around 0.60%), I suspect Gareth Morgan got his fair share of honey before cashing out.

by Hamish | 25th Oct 12, 2:29pm 1351128551

Be interested to see detail below the closing balance, how much was member contributions, how much was emloyer contributions, how much was tax payer contributions, then less fees and compared to inflation over the 5 year period.

by Craig Simpson | 25th Oct 12, 3:52pm 1351133544

All the raw data is available in the various reports embedded in our story - will be in the Appendices under the heading Categories of income for annual return year.

You may also want to consider transfers from other schemes in your analysis.

by SmoKey | 25th Oct 12, 4:27pm 1351135654

And this has given more fee income to banks that run these funds, as if they are not making enough...

by Frostwind | 26th Oct 12, 10:33am 1351200833

Kiwiscammers - for sheeps that have yet to figure out they are just feeding the elite financial parasites....

Unless you are like 60 and ready to retire soon, it's best to invest your own money into the property market and let inflation do the work for you.

Which funds have outperformed the property market (not even counting the leverage)?

Which funds have outperformed gold?

Which funds have outperformed the stock markets worldwide (eg US)?

Why can't we make our own decision about our own money, without feeding the financial parasites?

Wake up Sheepees!

by Ms de Meanour | 26th Oct 12, 11:58am 1351205902

Nothing stops you from from making your own clothes, growing your own vegetables, painting your own house, reaching your own legal opinion, fixing your own plumbing.

If you're confident you can do it better than a professional and have nothing better to do with your time and skills, then it's a good idea to do so.

If not, then you are likely to be better off paying a professional to do it for you.

There's no shame in that, and no call to be contemptuous and scornful of those who make that choice.

Same goes for managing money.

by Frostwind | 26th Oct 12, 12:41pm 1351208510

I dont have the option of kicking them out for a job that I can do better myself.

I have a choice not to buy clothes, not to call the plumber and read my own contracts without any external parties if I don't think I need them.

But kiwiscammer, once you are in, they've locked in fees for years to come while delivering a sub-standard service (% return). I can do a better job myself.

by Frostwind | 26th Oct 12, 10:42am 1351201325

It is pretty juicy for the financial elites

by R u sure about that | 2nd Nov 12, 1:55pm 1351817721

3.4% over 5 years, that is peanuts.

The headline is a bit sensationalist.

You are free to choose funds. Try not to get too hung up on fees. I'm very happy with my high fee fund that I switched to exactly one year ago. It has returned 11.4% in that time.