Government's 'game theory' tactic promises cascade of KiwiSaver fee cuts

Sunday, 24 January 2021

In May, KiwiSaver providers will find out which get to keep their lucrative default status. In November, default funds will change from being low-risk funds to higher-risk funds holding more growth assets such as shares.

Savers can expect a cascade of KiwiSaver fee cuts from the Government's clever use of “game theory” in the Covid-delayed review of default providers, one KiwiSaver provider has said.

In May, the Government will announce which of the nine current default KiwiSaver providers get to keep the status. This means they are allocated a share of savers joining KiwiSaver who do not choose a provider for themselves.

It's been a lucrative status to have since KiwiSaver launched in 2007. At the end of September, the nine default funds had a combined $10.4 billion invested in them by members of the public.

Any KiwiSaver provider losing default status in the review, which was due to have been concluded by November, would see its default savers transferred to rival default providers.

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One KiwiSaver provider, who said the review’s confidentiality clauses barred him from speaking openly, said the Government was using that threat to get KiwiSaver providers to pitch fee cuts.

“This is their big shot to change industry behaviour,” the source said.

Fees remain a contentious issue in KiwiSaver, with the Financial Markets Authority (FMA) concluding they have not come down as fast as would have been expected in a competitive market. Former commerce minister Kris Faafoi had previously sent a clear message that fees would be factored into which providers got to keep their default KiwiSaver status.

Government gaming providers on fees

The default provider tender required the KiwiSaver default providers – AMP, ASB, ANZ, Bank of New Zealand, Booster, Kiwi Wealth, Fisher Two, Mercer and Westpac – to make pitches on how they would operate their schemes.

KiwiSavers have been getting a better deal from some default providers following a round of fee-cutting by Mercer, AMP, and Westpac after the FMA published its conclusions in late 2019. Others, such as BNZ, had moved on fees slightly earlier.

The $10.4b default funds are conservative funds, with the bulk of their money invested in safe bonds and cash.

But from November default funds will have to become balanced funds, which invest more of savers’ money in shares, a move the Government hoped would give default savers the best chance of having a decent nest egg saved when they retire.

National Capital founder Clive Fernandes doubts any KiwiSaver providers will lose their default status.

The average fees of the default funds were about 0.5 per cent a year, while the average cost for balanced funds was just over double that, figures from fund researcher Morningstar show.

Forcing down the pricing of the balanced funds would cause a cascade effect, the source said, putting pressure on default KiwiSaver providers to also drop fees on their moderate and growth funds, as well as putting pressure on non-default KiwiSaver schemes to do the same.

Losing default status

Not all of the default providers have performed equally well, but few market participants expect any of the current providers to lose their default status.

“I don’t believe the Government will say to any of them, ‘You’re no longer a default provider,’” said KiwiSaver researcher Clive Fernandes from National Capital.

“The Government changing their provider without explicit consent would add fuel to the concerns of some KiwiSaver members who believe the Government can step in at any time and help themselves to KiwiSaver savings,” he said.

Booster's head of sales and marketing, Diana Papadopoulos, said it had taken over several KiwiSaver schemes and that mass saver transfers were easily managed.

Who’s at risk

Papadopoulos said all KiwiSaver default providers should be held to account in the review, including for their performance, but the unnamed source predicted at least one default provider would lose out, perhaps making way for a new default provider, though only Simplicity is known to have applied.

“They will tinker at the edges, and they will end up with seven to eight providers,” the source predicted.

The Government’s KiwiSaver-related policies have focused on ending investment in fossil fuels, educating default KiwiSavers, diversity, and the nebulous concept of “value for money”.

AMP Wealth Management chief executive Blair Vernon says AMP’s KiwiSaver scheme will be cutting fees.

But, the unnamed source said: “They aren’t using returns as a criteria at all, just fees and administrative efficiency.”

Default fund performance

Morningstar data shows AMP provided the lowest after-fee, before-tax returns of the default providers over five and 10 years in the 12 months ended on September 30, 2020, for default, growth and balanced funds.

Mercer also delivered relatively weak returns, Morningstar data showed.

AMP Wealth Management chief executive Blair Vernon said that by the middle of the year AMP’s scheme would have moved from being actively managed to a passive, index-tracking investment management approach.

This would result in cuts to fees, he said.

Westpac also expected fees to come down as a result of the review.

Retirement outcomes were determined by more than just investment returns, Vernon said.

Other factors such as whether investors were in the right fund, made ongoing contributions, and did not panic in market collapses all contributed to how much they would end up with at retirement.

Trying to work out what KiwiSaver fees you have paid in dollars and cents can be extremely hard.

Vernon said AMP’s default clients had a higher average KiwiSaver balance than the industry average as a result of the digital tools and advice it provided to its savers.

Mercer’s Martin Lewington said Mercer’s performance was good but had suffered relative to other default providers as a result of asset allocation decisions.

“We are confident about where we are as an active manager,” Lewington said.

The cuts it had made to fees, including for people with low-value balances, meant it felt its funds were now priced at the right level, Lewington said.

But he saw scope for others to cut fees, including KiwiSaver schemes pretending to be more actively managed than they really were.

Educating savers

Default KiwiSaver providers have come in for flack from the FMA for doing a poor job of getting people with money in default KiwiSaver schemes to make “active” choices, including to switch to higher-risk, potentially higher-return balanced and growth funds.

The latest data the FMA published in the 12 months to the end of March showed ASB and Booster managed to encourage 16 per cent of their remaining default savers to make an active choice, followed by Westpac on 14 per cent and Kiwi Wealth on 9 per cent.

AMP managed just 6 per cent, Fisher Two and BNZ managed 7 per cent, and Mercer and ANZ managed 8 per cent.

MADRID, SPAIN - DECEMBER 08: A demonstrator wears a mask reading 'Climate Crisis' during a protest outside REPSOL Headquarters on December 08, 2019 in Madrid, Spain. Indigenous leaders and activists are protesting in Madrid against oil contamination and the fossil fuel industry in Brazil because of the damage it provokes to the poorest communities, sea life, food supplies and the climate. (Photo by Pablo Blazquez Dominguez/Getty Images)

Lewington said Mercer was beefing up its engagement, while AMP said the 2020 figure did not capture the work it had done in the previous four years.

Lack of women

The Government has set targets for diversity in its agencies, but KiwiSaver default funds’ lists of “key personnel” show just five of the 40 key personnel are women, and that AMP, ANZ, ASB, Booster and Fisher Two had no women listed at all.

Papadopoulos said diversity would be better seen as diversity of thought, and Vernon said diversity should be judged on a wider context than just the key personnel on KiwiSaver funds.

“We have set a target of having 50 per cent of women in senior leadership roles by the end of 2021, currently 40 per cent, while overall 55 per cent of all our employees are women,” Vernon said.

Fossil fuel-free

KiwiSaver default providers were expected to go fossil fuel-free in their default funds, which none of the default providers has yet moved to do.

While default applicant Simplicity had gone fossil fuel-free, and Booster had offered fossil fuel-free funds for many years, many KiwiSaver schemes have not shown historic commitment to environmental stewardship. ASB has launched a Positive Impact Fund for KiwiSaver that excludes investments in fossil fuel companies.

Some KiwiSaver schemes, including BNZ, Westpac and ANZ, had excluded investments in companies earning a substantial portion of their incomes from thermal coal, or “unconventional” oil and gas, such as those extracting it in the Arctic, or from oil sands, or by fracking.

Vernon said the AMP business had worked hard to reduce its carbon footprint, and once it had shifted to becoming a passive KiwiSaver manager, it would be able to exclude fossil fuel investments easily.