- How New Zealanders miss out on hundreds of thousands in retirement savings
Senior Lecturer – Finance, Auckland University of Technology
In the 12 years since New Zealand introduced the retirement fund KiwiSaver, nearly three million New Zealanders have enrolled and 30 KiwiSaver providers are now collectively managing NZ$57 billion in investments.
But questions are being asked about whether KiwiSaver members pay too much. A recent report commissioned by the Financial Markets Authority shows that New Zealand funds charge on average 25% to 50% more than equivalent UK funds.
In the year to Sept 2019, fund providers earned NZ$479.8 million in fees, with each member charged an average of NZ$132 per year.
Our research explores the gap between initial expectations and reality, and shows that New Zealanders miss out on tens, and in some cases hundreds, of thousands in retirement savings.
Impact of fees on savings
The New Zealand government introduced KiwiSaver in 2007 to address a lack of retirement savings. The savings scheme takes employee and employer contributions and gives them to a private fund manager to invest. Members can either choose a fund manager or are assigned one at random. The government also makes a contribution, which we included in our calculations, but note that not everyone is receiving what they are entitled to.
Managing a fund costs money, and with nearly NZ$57 billion invested, New Zealanders have paid NZ$479.8 million in fees to fund managers. Fees are often quoted to members in a way that makes them appear deceptively small.
For instance, the average KiwiSaver growth fund will cost 1.25% per year. The equivalent UK fund would likely cost around 0.92%. To many New Zealanders, this difference may sound inconsequential, which has motivated a recent move to quote fees as dollar amounts on annual statements.
Fees are a double-edged sword. They erode retirement savings by reducing monthly contributions and the future compounding of those savings. The result is tens of thousands less in retirement.
For example, a 25-year-old member in the average growth fund with an income of NZ$50k is likely to pay NZ$50k in fees over the life of their KiwiSaver. They will retire with about NZ$255k in savings. In contrast, the cheapest growth fund would charge just under NZ$15k in fees over the same period, and would result in over NZ$300k in savings at retirement.
Economies of scale
While policymakers debate whether New Zealanders pay too much, research looks at economies of scale. When the government established KiwiSaver, policymakers thought the high fees KiwiSaver providers were charging would reduce as more people invested.
They expected that as funds increased in size, the costs of running them would be spread over larger pools of funds and it would become cheaper to manage the investments. These cost savings would then be passed on to members.
We collected data on the total fees charged by KiwiSaver providers along with the assets under management and the number of members a fund has. Our project included 24 fund providers and over 267 individual funds (across five risk groups) between 2013 and 2018.
If there are economies of scale present, then as a fund gets larger, either by increasing the amount of money or by increasing the number of members, the fees should increase by a less than proportional amount. Put differently, a 1% increase in size should result in a less than 1% increase in fees
But this is not the case. When we consider the amount of money invested, a 1% increase in the assets under management results in about a 1% increase in fees. In other words, as the total sum invested in KiwiSaver increases, we can expect total fees to increase at the same rate. This means KiwiSaver providers are either not seeing any cost savings at all as they get bigger or are refusing to pass these savings onto investors.
When we consider the number of members in a fund as the measure of size we see some evidence of economies of scale. A 1% increase in members results in a 0.93% increase in fees, a small reduction in the fees.
Unfortunately, large increases in KiwiSaver members are unlikely. KiwiSaver already has over 80% of eligible New Zealanders enrolled. In 2019, the number of members grew by 3% across all funds. Future economies of scale won’t be large.
The expected cost savings have not materialised and seem unlikely to. The total amount of KiwiSaver fees providers collect looks set to continue to increase at a steady rate. For members, the consequence will be expensive funds (compared with their peers in other countries) and far less in retirement savings come age 65