KiwiSaver distribution: FMA sees ‘more work to do’

The Financial Markets Authority (FMA) is keeping a close eye on KiwiSaver distribution tactics in the value-for-money era despite a slowdown in the scheme transfer market over the 12 months to the end of March, according to John Horner, director of markets, investors and reporting.

“We have more work to do in the KiwiSaver distribution space,” Horner said.

He said the regulator closely monitors KiwiSaver advertising and marketing practices, which fall under fair dealing provisions, while adviser remuneration was a focus of the regulator’s value-for-money follow-up study last year.

The May 2022 report noted the FMA had “set firmer expectations and clearly identified conduct constraints relevant to trail commissions and marketing” in KiwiSaver particularly.

“The FMA has also signalled tightening expectations for incentives and will update existing guidance on how incentives are offered subject to consultation.”

While the regulator had considered requiring providers to unbundle adviser payments from total administration fees – only charging extra to members who actually received advice – it ultimately decided to allow embedded distribution costs to remain as is.

However, in the wake of the 2022 study, the FMA has pushed for better disclosure of KiwiSaver adviser commissions and proof that advice, or service, is delivered for such payments.

While advisers are becoming more influential in driving scheme changes in the KiwiSaver market, the latest FMA report on the sector released last week shows the total number of transfers between providers sunk to a 10-year low during the 12 months to the end of March 2023.

Just 131,260 members swapped schemes over the period, the report says, “down 16.8% on 2021, and the lowest number since 2013”.

But, as the recent Investment News NZ 2023 KiwiSaver study found, most of the winners in the transfer market had strong support from advisers.

Excluding the Fisher Two scheme (which onboarded members from its 2021 acquisition, Aon, last August) and Simplicity, the top five providers reporting the highest net transfer of funds all compete in the adviser market: of these, Milford, which also has a strong direct membership, headed the net transfer figures for the year ($563 million) followed by Generate ($237 million), NZ Funds ($82 million), Booster ($72 million) and Aurora ($65 million).

Typically, schemes competing in the adviser market pay between 0.25-0.5 per cent in ongoing commissions with flat dollar sign-up fees of reportedly up to $500 per member with the costs included as part of administration expenses.

For instance, the NZ Funds scheme document notes that the business “may pay an external financial advice provider an onboarding and ongoing service payment in recognition of the effort and costs associated with providing services to you”.

“These payments are made out of the revenue earned by NZ Funds for managing the Scheme and are not directly deducted from the Balanced Fund or the Strategies.”

Nonetheless, as both the Investment News and FMA reports reveal, overall KiwiSaver fees and expenses fell for the first time in nominal terms as several of the biggest providers cut the vexed fixed dollar administration fees during the period.

Total costs (including investment management and administration fees) fell to about $660 million in the 2022/23 year from almost $720 million in the previous 12 months – with AMP, ANZ, ASB and Westpac cutting more than $40 million between them: the FMA report shows admin fees fell to $17.3 million from over $50 million in the 2021/22 year.

Horner said the FMA was pleased to see the KiwiSaver fee take decline, citing the admin fee removals and the default scheme repricing as the main factors.

He said providers “generally agreed” that removing the fixed dollar member fees “had to happen, and was the right thing to do”.

“There’s also been a flow-on effect from the default process coupled with the value-for-money guidance.”

The Investment News study estimates overall KiwiSaver scheme costs per average funds under management plummeted to 0.72 per cent for the 12 months to March 31, 2023, compared to 0.84 per cent in the previous year.

Horner said the FMA expected the average cost of KiwiSaver to fall further as funds under management grow.

“We won’t ever put a number on [a target fee level],” he said.