KiwiSaver providers must show value: FMA
Authority orders annual reviews and warns firms of regulations
KiwiSaver providers have been told they must review their fees annually and prove they are providing value for money or face potential regulatory action.
The Financial Markets Authority has released guidance to fund managers and their supervisors over fees amid concerns that KiwiSaver members are not getting good value for money.
About three million Kiwis belong to KiwiSaver and have more than $76 billion invested in the scheme.
Last year’s annual KiwiSaver report by the FMA found they paid $538.9 million in fees in the year to March 31, 2020 — up 12.3 per cent on the prior year.
That was despite investment returns being down 122 per cent over the year.
But while providers are managing more money, the FMA has found they are not passing on the scale benefits to members, there is no systematic relationship between fees charged and returns and no systematic relationship between fees charged and the degree of a scheme’s active management.
Active management is where a person makes decisions on where money is invested versus using a computer algorithm to track a market index which is called passive investment.
Most KiwiSaver providers are active fund managers, although a growing number use passive management, which is a much cheaper way of managing money.
The FMA research also found active managers typically do not beat their benchmark index, after fees, over meaningful periods and passive managers typically do not closely replicate the performance of their market index after fees.
Paul Gregory, director of investment management at the FMA, said while the guidance was focused on supervisors and fund managers it should also provide members and investors with more information.
“In terms of what should an investor see out of it is either one of two things — their provider is able to show some robust support for the fact the fees they are charging are not unreasonable and the value the member gets in return is at least adequate.”
Or, Gregory said, the review process could result in changes to the managed fund to add value to the member or reduced fees or both.
He said the guidance did not create new responsibility or requirements on fund managers or supervisors.
While the FMA checks the fees upon the launch of a new KiwiSaver scheme, it is up to a scheme’s supervisor to check the manager is continuing to meet this.
Under the new guidance, fund managers will be expected to review their fees and value for money with their supervisor and prove the review has taken place.
If the review finds the fees are not offering good value for money, they will either be expected to increase their services or reduce fees or do both.
If the fees are found to be too high, a provider may need to refund members.
The guidance includes all managed fund providers, not just KiwiSaver managers, to take fees and their value for money into account.
It has set out four principles they must assess their fees against; the risk and returns, how they are sharing the financial value of investment management, that advice and service is received, not just offered, and urges managers to review their own fees as rigorously as they would for the fees of underlying managers.
KiwiSaver providers have an obligation under the law to avoid unreasonable fees. This doesn’t apply to managed funds outside KiwiSaver but managers are still obliged to put members’ interests first.