Pension schemes not so super
Workplace superannuation schemes deliver ‘massive, monumental underperformance’, writes Rob Stock.
Old-style workplace superannuation savings schemes are often delivering lower returns from their investments than KiwiSaver schemes, prompting calls for changes.
Old-style workplace super savings schemes are increasingly revealing to savers how they are tracking compared to KiwiSaver funds, and it’s not flattering their performance.
Schemes publish charts showing their funds’ performance compared to the median, or average, KiwiSaver fund in each fund category.
There is big money tied up in some of the schemes, include the $1.2 billion UniSaver scheme for university employees, and the $2b Police Super scheme.
Superannuation scheme expert Chris Douglas from MyFiduciary said workplace schemes hadn’t had the same scrutiny as KiwiSaver, and there hadn’t been much pressure on them to cut fees by negotiating better deals from the external fund managers they hire to invest their savers’ money. Some of the workplace schemes were big enough to demand fee cuts of 2-30 per cent from fund managers, Douglas said.
‘‘Workplace savings schemes are big enough to get these economies of scale, but we don’t see their fees being adjusted down,’’ he said.
KiwiSaver has not escaped that criticism, either. Douglas was a coauthor of a research paper for the Financial Markets Authority in August which indicated some KiwiSaver schemes were charging higher fees than were justified, and that fees were not reducing in line with economies of scale as KiwiSaver schemes bulked up. But the number of lower-fee KiwiSaver schemes is rising.
In the three years to the end of June, according to calculations by Simplicity KiwiSaver founder Sam Stubbs, five workplace superannuation schemes (NZ Police, UniSaver, Dairy Industry, NZ Fire Service and NZ Post), which contained more than $4b combined, would have delivered additional returns of more than $370 million had they been invested in low-cost, passively-managed funds such as the Simplicity KiwiSaver scheme.
The five schemes have just over 33,000 members drawn from the industries they served, Stubbs said.
‘‘The net result is significant underperformance, making over 30,000 ordinary hardworking Kiwis an average of $11,218 poorer than they could have been by just investing in the index,’’ Stubbs said.
Passively invested funds tend to be cheaper simply because they follow market movements. Active managers sometimes charge more but claim they can produce better-than-market returns.
The big workplace super schemes are managed by trustees, who pay global investment consultants such as Mercer and Russell to help them set their investment strategy, and invest their savers’ money.
Martin Lewington, chief executive of Mercer in New Zealand, said the advent of KiwiSaver in 2006 had led to a decline in the number of workplace schemes.
‘‘Probably 20 years ago, there were 2000 of them, and then KiwiSaver came in, and they fell off a cliff. Of the big meaningful schemes, there probably wouldn’t be more than 20 now,’’ he said.
He guessed there could be about $6 billion in funds under management in those workplace schemes.
There was more than $60b in KiwiSaver now. KiwiSaver had become the favoured way to save for retirement at work, Lewington said.
‘‘It’s right those schemes see KiwiSaver as a peer, a competitor, and something they should be benchmarking themselves against, because employees have the choice,’’ he said.
The global consultants had a global diversification focus, investing more in overseas assets than many KiwiSaver schemes, which were more heavily invested in the New Zealand sharemarket.
‘‘That’s had a huge impact on performance,’’ he said.
‘‘If you’ve been underweight New Zealand assets relative to whatever your peer group is, chances are you have been underperforming.’’
UniSaver told savers the reason for its underperformance in the past five years included its lower weighting in international investments, but it also said some of its overseas fund managers had simply underperformed.
‘‘We are monitoring this situation closely and maintain an ongoing dialogue with the scheme’s investment manager to make sure the scheme’s overall investment approach and the asset allocation for each fund continues to serve the long-term interests of members,’’ UniSaver savers were told in the scheme’s latest returns update.
The old workplace schemes might also be more
risk-averse, if they had savers with a higher average age.
‘‘They’re not getting the young members coming through,’’ Lewington said.
In a statement, the NZ Post Superannuation Plan trustees said they were comfortable with the performance of the plan, but had to bear in mind that this may be employees’ only savings, and ‘‘prudent management’’ was important.
‘‘The plan regularly seeks and receives feedback from members, who have also expressed their comfort with how it is performing,’’ it said.
Not all workplace-based super members have been comfortable with performance.
Some NZ Police scheme investors had raised questions about relative performance, leading to the scheme’s trustees conducting a review of its investments.
Stubbs dismissed the suggestion that workplace schemes were more conservatively managed, saying: ‘‘That still doesn’t account for the massive, monumental underperformance. On every category; moderate, balanced, growth, they are under-performing.’’
He said the decision of trustees, advised by the likes of Mercer and Russell, to invest less in New Zealand assets than KiwiSaver funds typically did was a bad call.
‘‘They [the pension consultants] have totally got the wrong asset allocation, and have lost people money, and should probably be fired as a result,’’ Stubbs said.
‘‘Russell and Mercer are both here in New Zealand. They have staff in New Zealand, and a New Zealand perspective.’’
Both also ran KiwiSaver funds, Stubbs said. He called on super scheme trustees to look seriously at whether they should be moving away from costly, active fund management, and instead investing passively, as AMP recently decided to do.
Roger Sutherland, authorised financial adviser, from Private Wealth Advisors, said the big workplace schemes had helped workers amass retirement savings, which they might not have had in the absence of KiwiSaver.
‘‘Anything that encourages saving for retirement is a good thing,’’ Sutherland said.
But, he said: ‘‘They probably followed a more conservative asset allocation model with a higher allocation to international markets.’’