Financial Regulation Update – A focus on KiwiSaver
KiwiSaver has been a recent focus for the Government and the Financial Markets Authority (FMA) – with the Government's release of its Request for Proposals (RFP) to appoint the next set of KiwiSaver default providers and the FMA's release of its KiwiSaver Annual Report (KiwiSaver Report) for the year ending 30 June 2020.
Although KiwiSaver membership and funds under management continued to grow over the last year, the FMA reported that there was a significant slowing in the growth rates of funds under management. The increase in funds under management dropped from between 16-21% per annum over the last five years to 8.5% for the year ending 31 March 2020. The FMA reported that as at 31 March 2020, there were 3,026,064 KiwiSaver members across 33 KiwiSaver schemes and a total of $62 billion funds under management. 381,034 KiwiSaver default members (12.6%) were in default funds with total funds under management of $4 billion.
RFP process for KiwiSaver default providers
The term for the existing nine KiwiSaver default providers expires on 30 November 2021. New appointments of default providers will be made by the Minister of Finance and the Minister of Commerce and Consumer Affairs with effect from 1 December 2021. These appointments will be for a seven-year term.
The Ministers have signalled that their preference is to appoint a minimum of five default providers and that more than five default providers may be appointed only if doing so does not materially decrease overall value for money. The RFP states that specifying a preference for appointing five default providers (rather than a higher number) encourages competition amongst respondents and enhances the overall service received by default members.
RFP criteria for KiwiSaver default providers
The RFP criteria reflects the following policy changes for default providers made by the Government:
Non-active default members of any current default provider that is not reappointed will be transferred to one of the appointed default providers with effect from 1 December 2021. This will ensure that those non-active default members retain the benefits and protections of being in a default scheme.
The default fund must be a balanced fund, rather than a conservative fund. The default fund must be established as a new fund without existing members and must be available to both non-default members and default members.
The default fund must comply with specified investment restrictions and exclusions (e.g. fossil fuels and illegal weapons and devices).
Standard fees must be limited to a percentage based fee and/or an annual fee. There are exceptions for innovative fee structures, provided they are simple and transparent. Fee structures are required to support members with balances below $5,000. Fees will be reviewed three years and five years after appointment.
There are specific requirements for default providers to engage with default members, including:
- to provide assistance to new default members in choosing the right fund and contribution rate;
- existing default member engagement at certain milestones, such as after purchasing a first home and when approaching retirement age; and
- engagement campaigns and activities at certain key milestones, such as in connection with government contribution payments, when a default member nears the end of a savings suspension and when a default member reaches eligibility age.
The default provider must maintain an environmental, social and governance (ESG) policy, which must be disclosed on the default provider's website and filed on the Disclose Register. The annual report for the default scheme must include information on actions taken over the year in relation to the ESG policy and any changes in the ESG policy since the last annual report.
Proposals will be evaluated on their merits according to the criteria and weightings set out in the RFP. There is a heavy weighting on fee proposals at 60%, with technical requirements weighted at 40%. This should incentivise providers to put forward competitive fee packages.
Providers are required to notify the Ministry of Business Innovation & Employment of their intention to submit a proposal by 13 November 2020. The RFP closes on 18 December 2020 and it is expected that Instruments of Appointment appointing the new default providers will be issued in the week commencing 26 April 2021.
FMA KiwiSaver Report – focus on fees and value for money
As part of the FMA's focus on fees and ensuring KiwiSaver providers are delivering value for money, the FMA commissioned MyFiduciary to provide an independent report on KiwiSaver providers' stated investment philosophy towards active and passive investment management, how this compares with their actual management of funds, and whether investment management fees differ between active and passive investment management approaches.
Key findings of the MyFiduciary report:
Most KiwiSaver schemes are 'true to label' in terms of their active or passive management style. However, a small number of providers who describe themselves as active managers are not materially more active than passive managers.
There is no significant relationship between the level of active management providers use and the fees they charge. This outcome differed from MyFiduciary's expectation that less active providers would have lower fees on average than most active providers, given active management is more expensive to deliver.
The results suggest that value for money in some KiwiSaver products is not as high as it could be. With greater scrutiny and competition, over time investment management fees should be more closely aligned to the investment strategy and there should be lower KiwiSaver fees overall.
In response to this report, the FMA said that it will engage with those providers whose fees were high but who had relatively low levels of active management.
FMA's comments on fees in the KiwiSaver Report:
The FMA stated that it will be undertaking further research into other factors contributing to the value for money offered to KiwiSaver members.
Investment management fee levels continue to be a focus area for the FMA, given average fees charged across the range of KiwiSaver fund types are largely unchanged in percentage terms when compared with five years ago.
The FMA will also produce industry guidance covering expectations around KiwiSaver fees and the requirement in the KiwiSaver Act 2006 for fees not to be unreasonable.
The FMA expects KiwiSaver supervisors to be engaged in conversations about fees with providers. The FMA stated that while it cannot set KiwiSaver fees, it does have regulatory tools available to take action in this space, including consequences under manager licences.
We therefore recommend that KiwiSaver providers review their fees to ensure they are not unreasonable and that they are acting in the best interests of their members from a value for money perspective. Please get in touch with one our experts below if you would like to discuss.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.