KiwiSaver is such a part of the fabric of New Zealand society and financial planning now, it seems strange to think that it was only launched 8 years ago. Launched on 1st July 2007, because there is a three month holding period for funds before they reach the KiwiSaver manager, the second important date for KiwiSaver is 1st October 2007.
On this date, fund managers started receiving KiwiSavers money and started investing it. Over the next two years, we experienced the Global Financial Crash/Crisis (GFC). This means that people who had been saving regularly into KiwiSaver have received some good investment returns on their investments that were made from March 2009 onwards as markets recovered. Fortunately most people did not have significant funds invested in the 18 months prior to the 'market bottom' in March 2009.
On this 8th Anniversary Treasury has released an interesting report that attempts to look at KiwiSaver provider profitability.
Treasury's 'Review of the KiwiSaver fund manager, market dynamics and allocation of assets' report
Treasury aimed to calculate the net profit margin made by each KiwiSaver provider. A tricky exercise which came with a caveat that admits to 'possible deficiencies in this data'.
However, the analysis provides an interesting point for discussion. How much profit should your KiwiSaver fund manager be making out of your investments?
Clearly, you want your KiwiSaver manager to be making enough money so that they stay in business. A number of funds are no longer in business (at the peak in 2009 there were 43 schemes in operation, there are now 33). If your KiwiSaver manager does not make enough money, then they may sell their business to another operator, which could significantly impact on how your KiwiSaver investments are managed.
On the other hand, you don't want your KiwiSaver manager to making a fortune at your expense.
How do the KiwiSaver managers make a profit?
Your KiwiSaver manager receives fees from you. These fees are usually made up of three components.
1. A monthly administration fee that seems to range between $1.00 a month (if you are part of a very large employer scheme with ANZ as your provider) up to $5 a month for some providers. This is a fixed fee that will always be charged to your KiwiSaver account regardless of how much money you have in it. Therefore, if you withdraw your funds to use towards a home purchase, you need to ensure that your remaining KiwiSaver funds are in the lowest monthly fee funds possible as you rebuild your savings.
2. Other fees charged on the basis of a percentage of the funds invested. These usually include a fee to pay for the investment management services and trustee/custodian services. Any commission or income paid to your financial adviser is likely to be paid out of this amount to your adviser. In addition, a handful of KiwiSaver managers charge a performance fee. When the returns on the fund are good, they take additional fees to 'reward' them for that performance. The pro's and con's of such a fee constitute a long separate discussion.
3. Flat fees for reimbursement for set costs - audit costs, accounting and legal costs, costs for issuing prospectuses and investment statements.
With the fees noted in 2 and 3 - the larger the fund the lower these fees tend to be on a % basis (apart from performance fees).
Your KiwiSaver manager then has costs that they have to pay out of those fees.
The majority of these costs appear to be overheads of their business and distribution costs. While advisers get a clear cut and defined commission payment, there may be many other distribution costs. If the KiwiSaver is distributed through a bank there may be salaries, bonuses and other costs. There may be costs for 'roadshows', advertising, brochures as well as overheads like salaries, IT, and general utilities.
What is the profit then?
The profit is the difference between the income and the costs.
So how much profit are the different KiwiSaver managers making?
According to the Treasury report, some managers are making a lot, some not much at all. Here is a summary of Treasury's estimations.
|Estimated profit as a % of total income
|BIGGEST SIX PROVIDERS
|Default Scheme Average
|Close to 0%
While it is good to understand how robust the business offering of your KiwiSaver manager is, and to check that they aren't making too much from you, at Moneyworks we consider that the key to a successful KiwiSaver manager is one that has reasonably low fees, and good consistent performance on an ongoing basis compared to other managers.
We will be doing our September quarter review of the key KiwiSaver Balanced fund providers in late October. This enables us to check that our recommendations to our clients are working well for them.
If you would like some information or assistance with your KiwiSaver, contact us by clicking here.
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By Carey Church