Should we weed out the worst performing KiwiSaver funds?

Should the worst performing KiwiSaver funds have the money taken off them? Photo / 123RF

As KiwiSaver approaches its twelfth anniversary there is growing interest from people in the performance of their funds. A new online tool launched by the government this year called Smart Investor has made it easier than ever to compare how well your fund is going against others. In part three of the series Tamsyn Parker looks at what should be done about the poor performers.

When Australia's Productivity Commission lifted the lid on its superannuation industry last year it found entrenched underperforming funds were harming millions of members.

The inquiry found significant numbers of products were underperforming, even after adjusting for differences in investment strategy and evidence of excessive and unwarranted fees despite the scale of the market.

The commission said inadequate competition, governance and regulation had led to the issues and it recommended a raft of changes including that default funds should become the 'exemplar" and that members should be able to choose a fund from a "best in show short-list" set by a competitive and independent process.

It also recommended a weeding out process for poor performing funds with funds required to beat their benchmark by 0.5 per cent per annum on a rolling eight year basis or face being shut down.

In New Zealand KiwiSaver members are currently left to their own devices to figure out if their fund is a poor-performer.

Tom Hartmann, managing editor of Sorted.org.nz - the government's money education arm, says people can go online see the after fee returns for their fund and compare it to others.

"From our point of view sunlight is the best disinfectant."

But Jessica Wilson, head of research at Consumer New Zealand, isn't convinced that is enough.

She would like to see providers and regulators doing a lot more to make members aware of how their fund stacks up.

Wilson said its research showed less than half of people felt they had enough information to make a good decision about their investments.

Some of those concerns were around where the money was being invested from an ethical point of view. Wilson said it was still really hard to find that information.

"You have got to realise we have over 200 funds - it is a pretty daunting task trying to compare them."

Wilson said while there was a small group of people who were really active in looking for information about their KiwiSaver fund it was not the case for the majority.

"The level of interaction with KiwiSaver providers is pretty low."

For some members all they got was a once a year paper statement, although providers must also post information quarterly online.

The statements do not have to contain any comparison information about how that fund performed relative to its benchmark or other funds in the same sector or how its fees compare.

"In a way our market has been left to itself. The safe-guards around getting good information weren't there at the start so they have been retro-fitted."

It was only last year - more than 10 years after KiwiSaver launched - it became compulsory for providers to tell their members what they were paying in fees in a dollar form on the annual statement.

Wilson said the Australian review of its superannuation funds showed the problems that arise when you don't have good disclosure.

"I think there is a much stronger role that has to be played by regulators in helping consumers navigate the market."

And she is particularly hot on the default providers having to do more to earn their right to automatically allocated members.

Wilson said if default funds were not performing they should lose their default status.

Consumer research showed default providers were some of the worst when it came to giving good customer service and those in a default fund were least likely to know which fund they were in.

She is also critical of the fees providers are charging saying the amount is growing as funds under management grow.

"We haven't really seen a lot of competition and what has happened has been superficial."

She believes the lack of competition is linked to weak regulation.

"I think one of the factors is there hasn't been the regulation there to force providers to cough up the information to make it easier for consumers to compare funds.

"If there was that pressure it would force companies to offer better deals."

The government is kicking off its default provider review this year and has already said a closer look at fees will be part of it.

Richard Klipin, chief executive of the Financial Services Council whose members include KiwiSaver providers, said it was still firming up its view on the default review with members.

But its latest data showed the KiwiSaver pie was growing and had now hit $54.8 billion with 2.85 million members. The average balance was more than $19k.

"The system is growing and that is a really good message for New Zealand."

Alongside the data the FSC released messaging over the weekend recommending consumers save now, save often and save smart by making sure they are in the right KiwiSaver fund, paying the correct tax rate and checking the fees they are paying to make sure they are getting value for money.

The average KiwiSaver balance now has more than $19k. Photo / 123RF

"Our members are taking a consumer- led lens to that. The question is are we there yet, are we perfect? No," said Klipin.

But he pointed the finger more at the advice side rather than the providers.

"It's like shopping around for a mortgage, you've got to make sure it is fit for purpose and that is where an intermediary comes in. And I think that is the missing part."

Klipin said there was an obligation for all parties - providers, regulators, the government - to do what is right for consumers.

"The question is how far does the line go?

He said consumers wouldn't walk into a bank branch and expect to see term deposit rates advertised alongside the average rate for the market.

The problem with KiwiSaver is a high-fee charging fund can eke away at a person's balance over 20 or 30 years and they may not realise how much money is going out on fees.

Klipin said KiwiSaver was a really important part of New Zealand's financial future and members needed to make sure they were in the right fund.

"Part of that is around being active and engaged as a consumer - it's up to all of us."

The size of KiwiSaver:

• 2.85 million members
• $54.8 billion invested
• average balance $19,246
Source: Financial Services Council

Want to see more from Tamsyn Parker? Sign up here for the Business News newsletter to get the best premium stories sent to your inbox daily.