KiwiSaver providers have been told they must review their fees annually and prove they are providing value for money or face potential regulatory action.
The Financial Markets Authority has released guidance to fund managers and their supervisors over fees amid concerns that KiwiSaver members are not getting good value for money.
Around three million New Zealanders belong to KiwiSaver and have more than $76 billion invested in the scheme.
Last year's annual KiwiSaver report by the FMA found Kiwis paid $538.9 million in fees in the year to March 31, 2020 - up 12.3 per cent on the prior year. That was despite investment returns being down 122 per cent over the year.
But while providers are managing more money, the FMA's research has found they are not passing on the scale benefits to members, there is no systematic relationship between fees charged and returns and no systematic relationship between fees charged and the degree of active management a scheme has.
Active management is where a person makes decisions on where money is invested versus using a computer algorithm to track a market index which is called passive investment.
Most KiwiSaver providers are active fund managers, although there are a growing number using passive management, which is a much cheaper way of managing money.
The FMA research also found active managers typically do not beat their benchmark index, after fees, over meaningful periods of time and passive managers typically do not closely replicate the performance of their market index after fees.
Paul Gregory, director of investment management at the FMA, said while the guidance was focused on supervisors and fund managers it should also provide members and investors with more information.
"In terms of what should an investor see out of it is either one of two things - their provider is able to show some robust support for the fact the fees they are charging are not unreasonable and the value the member gets in return is at least adequate."
Alternately Gregory said the review process could result in changes being made to the managed fund to add value to the member or reduce fees or both.
Gregory said the guidance did not create any new responsibility or requirements on fund managers or supervisors.
"What it does is designed to help managers and supervisors meet what is already there."
While the FMA checks the fees upon the launch of a new KiwiSaver scheme it is up to a scheme's supervisor to check the manager is continuing to meet this.
Under the new guidance fund managers will be expected to review their fees and value for money with their supervisor and prove the review has taken place.
If the review finds the fees are not offering good value for money they will either be expected to increase their services or reduce fees or do both.
If the fees are found to be too high a provider may need to refund overpaid fees to members.
The guidance includes all managed fund providers, not just KiwiSaver managers, to take fees and their value for money into account.
It has set out four principles they must assess their fees against; the risk and returns, how they are sharing the financial value of investment management, that advice and service is received not just offered and urges managers to review their own fees as rigorously as they would for the fees of underlying managers.
Gregory said it was not telling industry what to charge.
"What we do expect to see is a lot more information and support for why fees are set where they are and what the value is that members and investors get in return. That could be investment performance or there are non-financial returns as well that have value to members we just want far more work to go into articulating what that value is."
KiwiSaver providers have an obligation under the law not to charge unreasonable fees. This doesn't apply to managed funds outside of KiwiSaver but managers are still under an obligation to put the best interests of their members first.
"If there is anything more fundamental to members interests than not getting ripped off then I don't know what it would be," Gregory said.
If the FMA finds a fund managers' fees to be unreasonable they can prevent a scheme from advertising and accepting new members, direct a manager to comply, censure the company, alter, suspend or cancel its license or take court action which can impose a penalty or force a scheme to reduce fees and potentially refund members.
Despite years of the regulator highlighting the fees that providers charge and individual members being provided with the information on their annual statements in a dollar form there is little to show that members are shopping around and making decisions based on fees.
"While we have published information for KiwiSaver members about considering the value they receive for the fees they pay, research repeatedly shows that, in respect of financial products, regulatory effort is far more effective when focused on product providers themselves," the guidance notes.
KiwiSaver schemes typically charge an annual membership fee and a percentage of funds under management fee.
But the document shows the regulator wants membership fees to be eliminated.
"As scale and member balances increase, we see little justification for schemes to charge both a fixed membership fee and a base management fee (which is typically percentage-based). Accordingly, we expect to see KiwiSaver schemes move toward eliminating membership fees from their fee structures."
It would also like to see fees charged for advice charged directly to the member not the scheme so that members can opt out of the charge if they are not getting advice.