Article written by InvestNow

KiwiSaver has come a long way since its surprisingly successful debut in 2007.

Officially launched by the Helen Clark-led Labour government in July 2007, KiwiSaver accumulated over $720 million for more than 480,000 members during the first nine months of operation.

The first flood of KiwiSaver members blew Treasury budget projections out of the water, continuing to beat forecasts for years to come.

Aside from those automatically enrolled when entering a new job (so-called ‘soft compulsion’), many more New Zealanders volunteered to join a scheme in the first year.

True, most were lured by generous sign-on benefits ($1,000 free for every member), ongoing annual government top-ups to the tune of $1,040 and fee support. However, the outlandish popularity of KiwiSaver in the early years also reflected a genuine desire among New Zealanders for access to reputable investment/savings schemes that would help set them up for retirement and into their first homes.

2020 KiwiSaver milestones – the good, the bad, the ugly

By March 31 this year KiwiSaver had ballooned into a $62 billion money-saving machine working on behalf of over 3 million New Zealanders (or about 60% of our population), according to the 2020 Financial Markets Authority (FMA) KiwiSaver Annual Report.

Average member balance $20,474

The FMA analysis showed the average member balance sitting at just over $20,000, having achieved an increase of 5.4% from 2019, despite one of the most difficult annual periods in the history of KiwiSaver, due to COVID-19.

Negative investment returns – a first for KiwiSaver

Due to the March 31 reporting date, the FMA figures capture just about the exact low point of the COVID-19 market decline that erased 30% off global share markets. Overall, in the year to March 31, KiwiSaver reported investment losses of $820.5 million for the first time almost since inception. Compared to the positive investment returns of $3.8 billion reported in the 2019 KiwiSaver Annual Report.

Of course, markets have more than made up for those losses in the following months but the uncertainty triggered a surge in fund-switching behaviour late in March as some members sought refuge in conservative or even cash options.

Switching behaviour up 54% The FMA reported 256,393 fund switches in the 2020 reporting period – a 54% increase from the previous year. Over the course of the year, ‘$1.5 billion flowed out of balanced and growth funds, into conservative and cash investments’- a suspected behavioural response to the market lows.

But the regulatory report showcases a KiwiSaver system working mostly as intended during the 12 months to March 31, including paying out $1.33 billion to retirees and an almost equal amount in first-home withdrawals.

Fees – a drop in admin fees and a plan to assess management fees

The FMA highlighted some areas of concern in KiwiSaver, notably the relatively high level of fees compared to the growing size of funds under management. While administration costs fell slightly, the report notes investment management fees have yet to reflect the ‘economies of scale’ the FMA expected to see. ‘In some cases, KiwiSaver members paid fees on their balances, yet received a negative investment return’.

Earlier in 2020, the FMA flagged the fee issue in another study assessing ‘value for money’ in KiwiSaver.

The FMA ‘value for money’ report, carried out by consultancy firm MyFiduciary, found that KiwiSaver fees remained high compared to offshore jurisdictions. More importantly, the MyFiduciary study failed to find any link between the assessed active or passive investment strategies of KiwiSaver funds and the fees they charged.

Fees are also coming under pressure in the KiwiSaver default scheme review, where various providers are pitching to remain on, or join, the panel of schemes that receive new government-allocated members.

Both the default review and the FMA ‘value for money’ push will play out until at least the middle of 2021, setting the scene for more KiwiSaver fee news to come.

Onwards and upwards – 2021 positives

The grown-up KiwiSaver is certainly much-changed from its younger self. Aside from the obvious growth in both funds under management and members, the 2021 version for one, offers fewer government incentives (sadly the $1,000 ‘kickstart’ payment is history while the $1,040 annual ‘member tax credit’ has been halved). But at the same time, the 2021 KiwiSaver members have, and will continue to have, more choice than ever before as a result of innovative new KiwiSaver providers jumping into the mix, offering competitive fees, flexibility and a diverse range of investment options.

With more choice, comes more responsibility, but we’re hopeful more New Zealanders will start to play an active role in their KiwiSaver, making the most of the growing range of providers, to get better outcomes for their financial futures.

Helpful KiwiSaver links:

FMA KiwiSaver Annual Report 2020: https://www.fma.govt.nz/assets/Reports/Kiwisaver-Annual-Report-2020.pdf

FMA’s ‘About KiwiSaver’: https://www.fma.govt.nz/investors/kiwisaverandsuperannuation/about-kiwisaver/

Sorted KiwiSaver Fund Finder: https://fundfinder.sorted.org.nz/

Sorted KiwiSaver Savings Calculator: https://sorted.org.nz/tools/kiwisaver-savings-calculator

Sorted KiwiSaver Fees Calculator: https://sorted.org.nz/tools/kiwisaver-fees-calculator

Sorted Investor Kickstarter questionnaire: https://sorted.org.nz/tools/investor-kickstarter

FMA ‘Top 10 Investing Tools’: https://www.fma.govt.nz/investors/resources/10-top-investing-tools

Implemented Investment Solutions Ltd is the issuer of the InvestNow KiwiSaver Scheme. For a Product Disclosure Statement please visit www.investnow.co.nz/kiwisaver