The squeeze coming for the $100b KiwiSaver industry

Morningstar estimates up to 20 per cent of current KiwiSaver providers are not making any money and could soon fail or merge with other providers. Photo / Kenny Rodger

Some KiwiSaver providers will fail and investor returns will be more volatile as the industry nears $100 billion worth of funds under management, according to Morningstar.

The KiwiSaver fund management industry, which was birthed in 2007, was worth $96.2b at the end of September this year, with growth to date due to increasing membership and contributions.

However, it was no longer growing in a linear upwards trajectory - its size dropped for the first time in 2022 when equity and bond markets struggled.

“As it is maturing ... The actual market impact is going to have a significantly bigger impact,” Morningstar data director Greg Bunkall told the Herald.

Market fluctuations could cause the industry’s worth to move around within a band of about 20 per cent annually, he said.

“That’s not something New Zealanders should be scared about.”

Data showed KiwiSaver was serving its purpose with investors being rewarded for taking on more risk longer term and pressure being applied to fees.

“It’s working as it should.”

Investors in growth or aggressive funds made an 8.5 per cent return per annum over 10 years, compared with 6.6 per cent for balanced and 4.4 per cent for conservative fund investors, according to Morningstar research.

Fisher Funds acquired Kiwibank's Kiwi Wealth division earlier this year, making it the largest investment provider, with at least 500,000 customers and $22 billion in funds under management. Photo / Dean Purcell

Morningstar’s data showed the asset-weighted fees across the industry had dropped 8 per cent between 2016 and 2023, from 0.87 per cent to 0.8 per cent.

There was an even larger 16 per cent reduction in the average fees across growth funds, and a 22 per cent drop in balanced fund fees.

However, the dollar amount collected in fees by the whole industry increased to $635 million last year, compared with $302m in 2016, alongside growth in the scheme.

Bunkall said the pressure on growth fund fees was a good thing, and largely due to more investors moving their money into them.

“A lot of people have been talked into moving their money to more high fee paying growth funds.”

The portion of investors in conservative funds had almost halved from 45 per cent in 2016 to 27 per cent this year. This has largely been driven by the default funds moving from conservative mandates to balanced, and changes brought about by the Government.

Fund consolidation

There had also been an uptick in the number of providers and funds available for KiwiSaver members to choose from, fuelled by a “proliferation of what we call ‘platform funds’.”

Bunkall said these were effectively white-labelled funds that fund managers, who were not typically involved in KiwiSaver, had made available on investment platforms like InvestNow.

Is consolidation coming? Morningstar research shows recent growth in the number of KiwiSaver providers and products on offer.

The opposite was happening in Australia, he said, where the number of funds was declining rapidly - he expected that would eventually happen in New Zealand.

He estimated 10 to 20 per cent of KiwiSaver providers were probably not making any money and could soon fail or merge with other providers.

“Especially if the Financial Markets Authority is putting pressure on fees,” Bunkall said.

“If you’re doing the budgets for a KiwiSaver provider right now ... [You] can’t guarantee that fee growth each year.”

However, Bunkall said while there was a squeeze on the industry, he expected many providers to continue to create new products for investors.

“While you see compression, you also see topline growth.”