New KiwiSaver Guidelines Aim To Bring More 'Value For Money'

Apr 15, 2021

Kiwisaver

By Staff writer

The Financial Markets Authority has recently called out KiwiSaver scheme managers for not being transparent with their annual fees to savers. The FMA released a guidance to KiwiSaver schemes so they can prove that they are not charging high-priced fees which is against the KiwiSaver laws and regulations.

How did the KiwiSaver scheme managers respond to this?

Some KiwiSaver managers expressed their concern, stating that FMA's intervention on fees and value for money was unnecessary as it would backlash and the market would punish poor value, but according to Paul Gregory, the long-term nature of most investing may result in Kiwis being punished for a longer time.

If providers fail to conduct the annual fee reviews, they may face consequences from FMA, including a "stop order" which will prohibit the scheme from advertising or a "direction order" which means they will be ordered to carry out specific rules. They may also prevent a scheme from taking on new members or take it to court if proven that they’re charging unreasonable KiwiSaver fees.

What is the Financial Market Authority’s guidance?

The FMA's guidance dictates that fee reviews should focus on the following:

Where scale exists in the industry, its benefits are not typically passed on to investors
No systematic relationship between fees charged and returns to investors
No systematic relationship between fees charged and degree of active management
Active funds typically do not outperform their market index, after fees, over meaningful periods i.e., their recommended minimum investment period in their periodic disclosure statement (PDS); and passive funds typically do not closely replicate the performance of their market index after fees

The purpose of this guidance is to help managers and supervisors of KiwiSaver schemes on how they can demonstrate how they are following these obligations. That said, Paul Gregory, FMA investment management director, advises KiwiSaver Scheme providers to give value money reports yearly. This approach will help schemes identify what they need to improve on their products, especially when it comes to value for money. This will help schemes to justify and differentiate from other schemes their fees and the value for money they provide.

Overall, the main goal of this initiative is to provide better transparency and help savers make more informed decisions in terms of which schemes to put their money into.

What are the four key principles to show “value for money”?

The reviews must be based on four key principles, which will be applied when assessing reviews conducted by FMA or KiwiSaver schemes managers and their supervisors.

1. Risk and return are critical	The value for money for members depends highly on how well the manager's process and competence minimize the investment risk that members experience, and members' return after fees. If the manager fails to do this over a long period of time, supervisors will assess whether the manager has sufficient investment risk management competence to execute their chosen strategy.
2. The financial value of investment management must be shared	This principle gives importance to the member of the net return and how much of the return available to the member is taken by the manager in fees when compared to the return before fees. That said, the member's share of the financial value of the investment must be appropriate for the risk they're taking as well as the cost they have paid. Note that what is deemed appropriate will depend on several factors.
3. Advice and service is received, not just offered	This principle gives importance to the a service or feature provided by a manager to the member's value for for money if it benefits the member directly, especially when it comes to decision making, or it benefits the members' account such as reducing investment risk or increasing return.
4. Review yourself as you review others	Managers must have a clear understanding of its cost base and evaluate their fees and value for money to members the way they would evaluate themselves.

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