KiwiSaver fee move upsets the apple cart
A new player targets the costs that can have a profound long-term effect on retirement funds,
Fees could cost the average KiwiSaver about $55,000 over a lifetime. It’s ‘‘the largest household expense you’ve never heard of’’, says one fund manager, poised to launch a super low-fee KiwiSaver scheme.
It’s no secret in the KiwiSaver world that Sam Stubbs, the former head of Tower Investments, has been working on a bombshell for the KiwiSaver industry.
And, since Stubbs is one of two directors on a company called Simplicity NZ with another KiwiSaver specialist, Mark FitzGerald, it’s not hard to guess the name of the KiwiSaver scheme being readied for launch.
Unless fees fall, they are going to have a big impact on retirement standards of living, Stubbs says.
The $54,700 average lifetime cost of KiwiSaver fees assumes an average salary of $47,000, and is based on fee data from the Commission for Financial Literacy’s Sorted website, he says.
At their current levels, KiwiSaver fees will eclipse costs either in mobile phone charges or electricity, he says.
The KiwiSaver market is dominated by six big players, five of which are bank schemes.
That’s not leading to competition on fees, says Stubbs, and as fees are largely calculated as percentages of KiwiSaver balances, each year they grow with salary contributions.
‘‘There’s a classic prisoner’s dilemma going on,’’ Stubbs says. ‘‘Will one of the managers break with the rest and start cutting fees to get more market share? They know the others would cut their fees, and the market share would stay the same, so why would they do it?
‘‘Eight years into KiwiSaver, there’s supposed to be economies of scale coming through. There’s nothing wrong with making a profit, but there is such a thing as making too much of one.’’
Since the Global Financial Crisis revealed many active managers weren’t any smarter than the market, low-cost ‘‘passive’’ funds have been on the rise, says KiwiSaver expert Binu Paul from SavvyKiwi.
Passive funds keep costs low by mirroring markets, and making no attempt to beat them. By contrast, ‘‘active’’ fund managers attempt to use skill to outsmart the market.
Paul says passive fund managers have won market share from quasiactive managers.
These look like active fund managers, but they actually stick fairly close to markets, so the value they add is limited, or worse, their fees just increase the amount by which they fail to beat the market.
KiwiSaver has not experienced the passive revolution yet.
Paul says the only two large passive KiwiSaver options are ASB and NZX-owned SuperLife.
The bulk of KiwiSaver schemes are quasi-active schemes sticking quite close to each other, and to markets.
There are just a couple of truly active KiwiSaver managers; Milford and Fisher Funds.
Paul predicts Stubbs’ planned launch will bring the first real downward pressure on KiwiSaver fees.
Fees matter for superannuation funds.
Fund researcher Russel Kinnel from Morningstar in the US issues an annual ‘‘Predictive Power of Fees’’ report. It analyses the returns of funds, grouping them according to how high their fees (called ‘‘expense ratios’’) are.
The latest of his reports came out in May. There were no surprises.
‘‘We’ve done this over many years and many fund types, and expense ratios consistently show predictive power,’’ Kinnel says.
In the balanced fund sector, funds that invest in a mix of cash, bonds, property and shares, the cheapest fifth of funds returned an average of 5.86 per cent after fees per annum over the five years to the end of 2015.
By contrast, the most expensive fifth of funds returned 4.04 per cent per annum.
As investment returns compound over a lifetime, costs incurred in any year reduce returns in future years.
The growing appreciation of the impact of fees on the nest-eggs savers end up with in retirement has prompted headlines, and political action in countries like the UK.
Morningstar figures show the cost of the average balanced KiwiSaver fund is 1.1 per cent a year, which would make it more expensive than half the balanced funds included in the US report.
The passive ASB Balanced fund, the cheapest balanced KiwiSaver fund tracked by Morningstar in New Zealand, had an expense ratio of 0.62 per cent.
The average expense ratio for the cheapest fifth of US balanced funds was 0.22 per cent. For the next fifth, it was 0.52 per cent.
Stubbs says there is a place for truly active funds management in KiwiSaver. He says he’s a big fan of Bryan Gaynor from Milford, and he believes there’s a place for active management of things like private equity within KiwiSaver schemes.
‘‘Bryan Gaynor is an exceptional investor and I wish he could live forever, but the exceptional investor who can produce betterthan-market returns is rare,’’ he says.
Stubbs’ targets are the quasiactive managers.
Recent months have brought grumblings of discontent about whether KiwiSaver managers are being as upfront as they should be about fees.
In July, the Financial Markets Authority released research which showed many KiwiSavers wanted to be told in plain English the dollar amount of fees they were being charged each year, instead of being baffled by fees expressed as percentages of their fund values.
Stubbs believes that not only do most people not know what they are paying, but they don’t know how much a reasonable fee would be.
Very soon he plans to show them.