Low fees charged by providers to manage KiwiSaver funds will make the product non-viable and impossible to maintain, says retirement-product expert Paul King.
The consultant, ASB’s former head of strategy, said the product’s high-profile launch forced the financial services industry to cut costs to join the KiwiSaver party - Investment Advice costs that could not be maintained if KiwiSaver was to evolve.
Likening KiwiSaver to Britain’s simple, low-cost, top-up stakeholder pension - launched with great fanfare in April 2001 as the answer to that country’s retirement-savings crisis - Mr King said KiwiSaver’s inability to generate healthy profits could see it fall by the wayside.
“I don’t believe the providers, long-term, are able to support these products at these prices,” said the former head of corporate development for HSBC Life & Pensions UK.
“It’s all very well to say you’ve got half a million people in KiwiSaver but a large proportion of them ended up in there without knowing what was going on. In my experience the current charges haven’t included future service costs.”
Estimates by Wellington actuarial firm Melville Jessup Weaver put 85 per cent of all KiwiSavers with seven providers, six of them selected by the Government as default providers.
The big issue, he said, was Kiwis’ ignorance of managed funds. Stock picking, asset allocation, geographical and sector allocation, passive and active funds; “anything outside property and cash they just don’t understand”.
Throw into the pot this lack of understanding, add 50-plus KiwiSaver providers and 130-plus funds, mix in low charges “which equates to poor advice”, and the result is a “ticking time-tomb”.
“It’s not a bad product. It’s just undermined by poor costings. Obviously, as individual funds grow, so too will the need to diversify. That’s when it becomes more complex and you need better advice - but where’s that advice coming from, given current costings?”
Stakeholder pensions in Britain were shunned by financial advisers because of a government-capped 1 per cent annual management charge for providers - to help make the product affordable for the masses - prompting a relaunch in 2005 with a 1.5 per cent maximum charge. Despite this, the product had been largely ignored. “There are two issues at play here,” Mr King said. “You’re trying to get Kiwis to invest in something that’s not property or cash - big mistake.
“Then you’re looking to push a product that, over time, requires more resources for the same cost.
“The advice is unregulated, so you’re relying on the ethics of the financial advisers - those encouraged to invest in Bridgecorp spring to mind.”
Financial advice remains unregulated in New Zealand, though individuals and firms are bound by new disclosure rules.
The Financial Advisers Bill, now with Parliament, looks to establish a co-regulatory regime, with standards monitored by the Securities Commission and professional bodies.
Institute of Financial Advisers chief executive David Hutton agreed that the need for sound, reliable advice would increase as KiwiSaver in future got individual pots that swelled beyond $50,000.
“New Zealand needs staged levels [of regulation] which match the complexity of advice. There isn’t one size fits all,” he said.
“If that’s the case, there’s a real risk of setting the bar too high and a real risk of setting it too low.”
Boasting a membership of 1400 with more than 2000 clients, Mr Hutton said an active complaints list of 23 underlined how standards were improving for the better.
Michael Chamberlain, actuary and principal of KiwiSaver provider Aventine, said New Zealand was crying out for a principles-based, not rules-based, approach to regulation so the Retirement Commission could “name and shame” offenders.
Rationalisation over product design, quality of service and quality of product would see four out of five of today’s providers fail within the next 10 years as savers compared what they got for their fees - a large chunk of which covered management and advice.
Investment Advice “It’s very easy to design a scheme at low cost, but it’s difficult to generate enough to keep the people that matter happy with fat lunches.”
But Steven Giannoulis, manager of marketing and investors services at ING - which caters for almost a fifth of the 540,000 KiwiSavers and provides products for ANZ and National banks as well as running a default scheme - said low fees kept providers on their toes.
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