• Written by Ayesha Scott, Senior Lecturer - Finance, Auckland University of Technology
New Zealanders pay higher fees for KiwiSaver funds than people elsewhere. from www.shutterstock.com, CC BY-ND

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.


Read more: We're delaying major life events, and our retirement income system hasn't caught up


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, our 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.


Read more: There's a yawning gap in the plan to keep older Australians working


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.

The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.

Authors: Ayesha Scott, Senior Lecturer - Finance, Auckland University of Technology

Read more http://theconversation.com/how-new-zealanders-miss-out-on-hundreds-of-thousands-in-retirement-savings-127708

All You Need to Know About Trenchless Technology

For many years, the traditional sewerage lines and pipe developments were not enough due to the long wait and cracking. The traditional sewer pipe repairs involved cracking the earth to find the par...

News Company - avatar News Company

Before we rush to rebuild after fires, we need to think about where and how

A primary school in East Gippsland was burnt down in the current bushfire crisis. While Premier Daniel Andrews immediately committed to rebuilding the school as it was, media reported the local CFA ca...

Mark Maund, PhD Candidate, School of Architecture and Built Environment, University of Newcastle - avatar Mark Maund, PhD Candidate, School of Architecture and Built Environment, University of Newcastle

Australian sea lions are declining. Using drones to check their health can help us understand why

Australian sea lions (Neophoca cinerea) are one of the rarest pinnipeds in the world and they are declining. Jarrod Hodgson, CC BY-NDAustralian sea lions are in trouble. Their population has never rec...

Jarrod Hodgson, PhD Candidate, University of Adelaide - avatar Jarrod Hodgson, PhD Candidate, University of Adelaide

With costs approaching $100 billion, the fires are Australia's costliest natural disaster

It’s hard to estimate the eventual economic cost of Australia’s 2019-20 megafires, partly because they are still underway, and partly because it is hard to know the cost to attribute to de...

Paul Read, Climate Criminologist & Senior Instructor/Lecturer, Faculty of Medicine, Monash University - avatar Paul Read, Climate Criminologist & Senior Instructor/Lecturer, Faculty of Medicine, Monash University

In cases of cardiac arrest, time is everything. Community responders can save lives

Cardiac arrest can occur with little or no warning in people who were previously healthy, including young people. From shutterstock.comEach year more than 24,000 Australians experience a sudden cardia...

Bill Lord, Adjunct Associate Professor, Monash University - avatar Bill Lord, Adjunct Associate Professor, Monash University

So the government gave sports grants to marginal seats. What happens now?

When Australians pay their income tax, they assume the money is going to areas of the community that need it, rather than being used by the government to shore up votes for the next election. This is...

Maria O'Sullivan, Senior Lecturer, Faculty of Law, and Deputy Director, Castan Centre for Human Rights Law, Monash University - avatar Maria O'Sullivan, Senior Lecturer, Faculty of Law, and Deputy Director, Castan Centre for Human Rights Law, Monash University

The Olympics have always been a platform for protest. Banning hand gestures and kneeling ignores their history

It is the year of the Tokyo Olympics, and the International Olympic Committee was quickly out of the blocks with new guidelines regarding athlete protests. The IOC is worried the biggest stories of...

David Rowe, Emeritus Professor of Cultural Research, Institute for Culture and Society, Western Sydney University - avatar David Rowe, Emeritus Professor of Cultural Research, Institute for Culture and Society, Western Sydney University

Where Can You Get Weed By Ordering It Online?

Nowadays, everyone wants to get their hands on some weed. Marijuana has become legalized in a lot of countries worldwide. People wait in lines for days to buy some. You couldn’t have imagined that...

News Company - avatar News Company

Hidden women of history: Catherine Hay Thomson, the Australian undercover journalist who went inside asylums and hospitals

Catherine Hay Thomson went undercover as an assistant nurse for her series on conditions at Melbourne Hospital. A. J. Campbell Collection/National Library of AustraliaIn this series, we look at under...

Kerrie Davies, Lecturer, School of the Arts & Media, UNSW - avatar Kerrie Davies, Lecturer, School of the Arts & Media, UNSW

Sick and Tired of Your Dead End Job? Try Teaching!

Tired of the same old grind at the office? Want an opportunity to impact lives both in your community and around the world? Do you love to travel and have new experiences? Teaching English is the perfect job for you! All you need is a willingness to ...

News Company - avatar News Company

The Impact of an Aging Population in Australia

There’s an issue on the horizon that Australia needs to prepare for. The portion of elderly citizens that make up the country’s overall population is increasing, and we might not have the infrastructure in place to support this. Australians h...

News Company - avatar News Company