15 Dec 2021

Lower KiwiSaver fees do not result in better performance - report

6:22 pm on 15 December 2021

A new report looking into KiwiSaver's default fund changes has found lower fees do not help investors with better returns.

The Government has canned the $1000 KiwiSaver kickstart programme.

Photo: 123RF

The changes for default KiwiSaver funds came into force this month, with lower fees among the key changes, as the government looked to improve the financial wellbeing of default members.

A default member is someone who has signed up to KiwiSaver but has not made an active choice about where to invest and has been allocated a default provider by Inland Revenue.

It was the biggest shake up the default KiwiSaver scheme had faced since its inception - other changes included default funds moving to balanced from conservatives, and the number of default providers dropping from nine to six.

Investment research company Morningstar said it was clear that lower fees were the most important factor in default providers going forward.

But report author Tim Murphy said evidence suggested lower fees would not result in improvements for default members.

"Certainly that hasn't been the lived experience in KiwiSaver to date," he said.

The paper looked at the actual empirical evidence and real life data of KiwiSaver both within the conservative portfolios that have been the default until December 1, and the balanced funds that now made up default profiles going forward.

"Over every timeframe, there's little to no relationship between low fee funds outperforming high fee funds within the KiwiSaver environment.

"The data to date shows on average the low fee funds have provided no better fee return outcomes than high fee funds on average. Therefore, to use that as the overarching number one criteria, the basis of that is questionable," Murphy said.

He said he wouldn't suggest that fees should not be a part of the assessment in any fund selection process, but believed they should be one of several criteria in a more balanced assessment.

Murphy said other criteria should include looking at the providers' investment teams and processes, alongside the fees.

"When the best-performing balanced fund provider over five years, seven years and 10 years - Milford - doesn't even bother applying for default provider status, knowing it would have little chance of success given that its fees are some of the highest in the market, then the process must surely come into question.

"Surely any review of default providers should be aiming to attract the best-performing funds over the long term, as that is what will best meet the stated objective 'to enhance the financial well-being of default members, particularly at retirement' for the largest cohort of KiwiSaver members rather than a philosophical focus on just one data point-low fees."

The report said with several new entrants to the default space all offering low fees, it should be asked if being a default KiwiSaver provider was commercially viable for most firms.

It said if low fees were the main focus the government wanted to see in default funds, it could create and run one central default fund, where it can control fees without commercial considerations.

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