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Too many still stuck in default options as KiwiSaver funds top $40B, FMA says

Thursday 5th October 2017

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KiwiSaver assets have topped $40 billion as more New Zealanders save for their retirement but the Financial Markets Authority remains concerned about Kiwis' financial literacy and "disappointing" progress in encouraging users out of default funds.

The FMA's annual KiwiSaver report shows that for the year to March 31, assets under management rose by $7 billion from $33.8 billion in 2016, with investment returns bouncing back to $2.7 billion, close to 2015's record $3 billion. 

Still, chief executive Rob Everett said the market watchdog has been disappointed by falling numbers of default members making an active choice to either remain in their default fund or switch to a new fund, and providers need to do more to encourage those choices. Four of the nine default providers - ANZ, AMP, Mercer, and Booster (which re-branded from Grosvenor last year) - saw the percentages of members actively choosing a default option get worse compared to the previous year, although total numbers in some default schemes also fell. 

AMP, which has 118,500 members and is the largest default provider, - saw active choice fall to 2 percent, from 8 percent in 2016, when it had 133,500 default members. Some 5 percent of ANZ's 76,000 default scheme members had actively chosen that option, compared to 6 percent of its 79,500 members in 2016. 

Everett said the FMA doesn't think it's appropriate to use its statutory powers to require remedial action yet, as this is the second year the figures have been published. But it has contacted the chief executives of all the default providers, who include ASB, Fisher Funds, BNZ, KiwiWealth and Westpac, to express its concerns and expectations. 

"Our hope is they will lay out for us both the things they're doing, and the resources they're devoting in terms of dollars and people, to engaging with this segment," Everett said. "We appreciate it is hard, but if you look at the stats in the report we think they speak for themselves. All of the providers, even the ones that have gone up, we're disappointed with the result."

While the FMA doesn't have a target level for active choice of default funds, Everett said the current sub-10 percent levels "can't be good enough" and he wants to see them rise significantly over time, "whilst acknowledging there will always be a segment of this group that can't be persuaded to do anything."

"The providers don't like being compared to each other in public like this," Everett said. "When the default providers come up for review in a few years' time, we would be putting this table front and centre. Acquiring new members tends to be more of a priority but that's not part of the deal. You should be making special effort to reach these people."

The report also shows growth in the nominal level of fees, with average investment management annual fee for a balance of $15,000 rising to $97.82 from $84.15 in the previous year. Average administration fees rose to $30.28, from $29.84 in 2016. However, as a percentage of returns, management fees fell to 9.8 percent from 16.9 percent a year earlier.

With annual statements set to include a dollar figure for annual fees from March next year, Everett says people also need to think about the returns they're getting now and likely returns in the future.

"We hope people won't be completely focused on fees as opposed to returns, but we absolutely hope that people will start to do the comparisons and ask the questions about why they're getting charged more in one fund than another,"  Everett said.

He warned also against expecting the prolonged recent period of "benign" market conditions to persist indefinitely.  

"We have been through an unusually sustained stable period, a lot of where KiwiSaver is invested is overseas and will be impacted by events overseas, so it's really [important] to encourage people not to overreact if things do get choppy. Don't forget: this is a long-term retirement planning mechanism."



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