Dysfunctional defaults, quirky benchmarks: Russell details KiwiSaver’s flaws (and fixes)

Russell Investments NZ has requested a complete overhaul of their default KiwiSaver system. This exposed members to unacceptable return volatility and unexplained risk.

and follow up paper Until recently Criticism of local benchmarks A new Russell report points out that the default KiwiSaver “does not (yet) adequately serve the interests of its members by decisions made on their behalf.”

Since its launch in December 2021, the research shows that default KiwiSaver gross returns have ranged from -7.8% for Smartshares to -12.6% losses for Simplicity products, in a nearly 5% range.

“Assuming an initial investment of $9,000 (approximate average balance at transition), defaulting members of the worst performing funds are already about $450 worse than members of the best performing funds,” the report states. “The difference, which is a randomly assigned outcome, is difficult to defend.”

In addition, Russell’s research found that poor transition management, a large default fee disparity (0.2% for Smarthshares to 0.4% for Westpac), and the ill-conceived exclusion of fossil fuel stocks unfairly hurt default members. is giving

“Many defaulting members suffered lower returns than non-defaulting members in 2022 as sectors such as energy and utilities outperformed,” the report said. “…we believe default members will likely cost more than 60 basis points in 2022 due to various additional restrictions (associated with non-default KiwiSavers).”

The impact of such exclusion decisions should be quantified for investors, the study said.

Russell suggests that the default KiwiSaver system could serve better by allowing any provider to offer compliant products built on the new ‘simple’ heavyweight asset class benchmark. .

In contrast to the benchmarks used in the local institutional fund market, the report found it difficult to outperform most of KiwiSaver’s measures.

“This is not to say that most KiwiSaver benchmarks are ‘good,'” says Russell’s research. “But we don’t think it’s going to be easy to beat like many institutional total portfolio benchmarks. Not the reason.”

According to Russell, the KiwiSaver benchmark is a hodgepodge of indices thrown together in non-standardized recipes by various providers.

“Current benchmarking methods only add to the overall confusion rather than providing clarity and transparency,” the paper states. “Instead of benchmarks that provide a reliable means of assessing comparative performance, financial advisors and members rely on often-curated performance data published by the KiwiSaver managers themselves (e.g., over three years and three months). top funds). A record of the various funds available to them in the market. “

A risk-weighted KiwiSaver benchmark would be better built around a simple “investable” index that all providers must report, the report said.

“In our experience, even if it were possible to construct a series of benchmarks that would yield higher risk-adjusted returns based on capital market expectations, the KiwiSaver benchmark would outperform over the long term. It turns out to be difficult, and in our view it is close enough to the development of the KiwiSaver Benchmarks.”

‘look at everyone good bad? (part ii): A report on a better approach (and a proposal for a fairer default scheme) to benchmark Kiwisavers was written by Matthew Arnold, Head of Russell NZ.