04 October 2022

'5 mins with the FMA' podcast #3: KiwiSaver Annual Report 2022

5 Minutes with the FMA Director of Capital Markets, Paul Gregory

FMA Director of Investment Management Paul Gregory talks about the FMA’s latest KiwiSaver Annual Report, for the 2021-22 financial year. The report includes figures and trends found in KiwiSaver providers’ consolidated data, and summaries of the FMA’s key activities and ongoing focus areas.

Here we talk about the key stats, including the early impact of lower fee settings for default members, another jump in members in “socially responsible” funds, and liquidity risk management.

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Transcript of podcast:

Host: Kia ora and welcome to “5 minutes with the FMA” – a podcast by the Financial Markets Authority - Te Mana Tātai Hokohoko, about financial regulation in New Zealand.

FMA Director of Investment Management, Paul Gregory, is here to talk about our latest KiwiSaver Annual Report, for the year to June 2022 – KiwiSaver’s 15th full year. Paul, what’s the standout finding in this year’s report?

Paul Gregory: I think this report shows quite a tipping point in KiwiSaver, or definitely the start of one, and a big part was the substantial change in the settings for the default KiwiSaver providers, so you get allocated to one if you don’t make a choice. So the fees range from as low as twenty basis points, so two-tenths of one percent, up to forty basis points so these are quite reasonable and you get quite a lot for them. So we think that’s going to be quite influential on KiwiSaver as a whole, and the start of the impact of that has really come across in the KiwiSaver report, because the total number of fees and dollars that have been collected from default funds has dropped quite substantially and that reflects the change in fee settings.

And I guess the other thing which was also evident through fees is the impact of our own value for money work – so that’s not quite as evident as the changing in  default settings but if you look at the fees for active funds, they’ve still gone up but not as much as what they have done in previous years. Now, we can’t pat ourselves on the back for that too comprehensively at this point because the data’s not 100% conclusive, but it’s a sort of arresting of the constant upward progress in the amount of dollars that non-default KiwiSaver members got charged, so I think, probably and hopefully, fingers crossed, what we will see is that starting to flatten and come down in the next KiwiSaver report, and the next one after that.

Host: Now, as for this year’s report, it shows funds under management rose 10% to almost $90 billion as at 31 March. What’s behind that increase? 

Paul Gregory: Well from what we can see, a lot of it was from contributions, and of course that’s contributions from the member and contributions from their employer and of course the contributions from the government. Not a lot of support from the market for a lot of funds, even for conservative funds, as we’ve seen here, because in some cases people were getting negative returns on bonds and things like that. That was also despite some withdrawals, so over-65s up to almost $2 billion, and first home withdrawals stayed reasonably steady at $1.4 billion

Host: It was another year of growth for “socially responsible” funds, too: membership up 64% to over 36,000, and holdings of almost $900 million.

Paul Gregory: Yeah, so that’s for funds that have the explicit label, so that’s what they’re called – ‘responsible’ or ‘ethical’ – and that’s only a very small portion of the funds in the market that advertise using those sorts of concepts, or even who use those terms as saying ‘Oh we’ve got a responsible investment policy’, that sort of stuff in their PDS, or in their statement of investment policies, so the formally-labelled funds are a small portion of the market.

And then I guess the other side of this, it’s also about what people expect, and you see survey after survey, including our own, that shows that New Zealanders just expect their funds not to be invested in things like tobacco or cluster munitions or whatever, and they’re very surprised or upset when they find that that’s the case so this really is table-stakes for KiwiSaver, and that fund managers are unaware of this at their peril, I think.

Host: The report also says liquidity risk management is an ongoing focus for us, following our liquidity survey, last year. What’s the issue there?

Paul Gregory: Yeah, we did the managed investment scheme liquidity survey and that showed a pretty low level of awareness, quite surprisingly of something so fundamental.

But we’re starting to see in KiwiSaver, funds investing in things like private equity, rental property, property development, things like that, and those things are not easy to sell quickly. So it’s funds that are going into that kind of asset that’s prompting us to think about, well, people who are investing in those things, or thinking about investing in those things, really need to plan how they would treat their investors fairly if they needed to get hold of a lot of cash quickly, especially if these sorts of assets are occupying a larger and larger portion of their portfolio. Sometimes you need to sell to fund a lot of withdrawals at once when your fund value is also going down, because the market’s going down, and that can be pretty tricky, so you need to have figured out what you’re going to do in advance.

Host: Finally, what’s the main message to industry from this year’s report?

Paul Gregory: The message to industry from this report is that KiwiSaver members – and we saw this in the GST reaction as well – that KiwiSaver members have started to become more engaged either because they’ve shifted to, or been shifted to, products that just are good value, or because they’re thinking about these things harder themselves. So while you’re being encouraged to think about value for money and what you do for your members, by the regulator, your members are already doing that. So the quicker and more seriously that you come to this discussion yourselves with your members, the better it will be.

Host: Thanks Paul. That’s Paul Gregory, and that was another “5 minutes with the FMA”.

If you want to read the full KiwiSaver annual report it’s on our website. FMA.govt.nz

We’ll bring you more FMA insights next month. Till then, hei kōnā mai – bye for now.