Oct 5, 2022
In July 2022 research company fiftyfive5 conducted a biennial survey in New Zealand commissioned by the FMA. The purpose of the survey was to find out the views of 2,000 New Zealanders (males and females, different age bands, different regions) on their KiwiSaver annual statements and what uses they put them to. The results derived were compared with similar surveys conducted in 2018 and 2020 to see if there were any trends of note. In mid-September 2022 the FMA released a report on the survey, KiwiSaver Statements, (Report) the fourth such conducted to date.
KiwiSaver scheme managers would be the obvious audience for such a report, but because of modifications made to the questions asked in 2022 to include value-for-money (VfM) topics for the first time, there is wider relevance to all managed investment scheme (MIS) managers who will be subject to the initial round of VfM assessments to be completed by 30 June 2023. With recent release of the VfM assessment tool, collaboratively produced by the FMA and licensed Supervisors, the new annual VfM assessment regime as envisaged in the guidance Managed fund fees and value for money (Guidance) is good to go. The task now ahead for MIS managers and their Supervisors is to get on with the job.
MIS managers should be under no illusions as to the priority that the FMA is giving the VfM exercise. In its recently released its Annual Corporate Plan 2022/23 (Plan), the regulator states that it “has continued its focus on value for money and embedding competitive pressures within industry, to ensure that economies of scale are passed on to investors and that fees and charges fairly reflect the level of service received (p. 8).” It is very much in the interests of MIS managers to research what VfM means in order to perform the kinds of assessments that meet or exceed the threshold of what the FMA is demanding.
Arguably, the VfM assessment regime now in place is very much fund manager-centric, as it is MIS managers, including KiwiSaver managers, who are expected to judge the VfM status of their managed funds by their own lights, albeit that the VfM assessment tool has been designed to inject some objectivity and uniformity into the process, including requiring evidence-based data. Supervisors are supposed to add another layer of independent objectivity by reviewing all of the MIS managers’ fund-by-fund VfM assessments and if need be challenging the results. Above that stands the FMA, which will undertake sampling of VfM assessments completed by MIS managers and their Supervisors for quality control purposes and intervene where its powers are required. But the VfM regime within this layered system is still fundamentally dependent upon MIS managers’ self-estimation and say-so.
KiwiSaver schemes already have a proxy for VfM assessment in rule 2 of Schedule 1 KiwiSaver scheme rules of the KiwiSaver Act 2006. However, this rule simply states that fees must not be unreasonable and lists the entities which may not charge unreasonable fees, namely scheme managers, supervisors, administration managers, investment managers, and any other persons who charge fees for services in relation to the provision of a KiwiSaver scheme. The test for unreasonableness is set out in regulations 11 and 12 of the KiwiSaver Regulations 2006. The stated criterion for unreasonableness is “whether the relevant fee or fees in relation to the scheme are significantly higher [our emphasis] than the fees charged in relation to other schemes or classes of schemes (whether or not KiwiSaver schemes) that the FMA or the court considers comparable”.
It is evident that the unreasonableness test is not sufficiently broad enough in scope by itself to meet the FMA’s objectives for assessing VfM as set out in the Plan. For example, a KiwiSaver scheme might not have fees significantly higher than its peers upon comparison, but there could still be other ways in which it was not providing VfM. There could also be herding effects, whereby KiwiSaver scheme fees all settled at more-or-less the same price levels, such that no fees were significantly higher than any others, but yet VfM was still not being delivered, for example in not providing benefits to investors from economies of scale. Moreover, the unreasonableness test is applicable at scheme level and only to KiwiSaver, whereas the VfM assessments are to be conducted at fund level for all managed investment schemes (MISs) captured by the regime, whether or not they are KiwiSaver.
When we consider who these VfM assessments are intended to benefit, the logical answer is investors in retail managed funds and members of KiwiSaver schemes. Indeed, the Guidance states, “We expect managers and supervisors to provide us with evidence of these [VfM] reviews, and strongly encourage schemes to report the results of the reviews to their members in an appropriate form [our emphasis]” (Guidance, p. 4). Obviously then, a good place to start identifying what VfM actually means in practice would be to ask these members and investors what they believe VfM is and how they decide whether or not a managed fund they are invested in has delivered it to their satisfaction. This information, thankfully, is what the Report has delivered into the hands of the funds management industry and its Supervisors.
The Report devotes four pages of graphical analysis explicitly to VfM responses from the KiwiSaver scheme members surveyed (pp. 42-45) which we will examine below, but there are other pages that touch on VfM-related topics, typically by asking members about fund fees and performance, which will be considered first. It should be remembered that the Guidance states as its first key principle that:
Risk and return are critical
The two key indicators of value for money for members are how well the manager’s process and capabilities appropriately minimise investment risk that members experience (i.e. through volatility and loss); and members’ return after fees.
(Guidance p. 5)
VfM-related topics around fund fees and performance can be found in the Report’s graphical analyses of provider satisfaction on pages 30-41 and reasons for making changes to KiwiSaver scheme on page 46. Performance returns of the fund, low fees, and simple fees are rated as the most important to those surveyed. Females were more likely to place importance on low or simple fees.
Of interest to consider in the Report are member’s responses concerning advice and service levels received in relation to the Guidance’s third key principle:
Advice and service is received, not just offered
A service or feature provided by a manager contributes to a member’s value for money only if it demonstrably helps the member make better investment decisions (such as advice), or demonstrably benefits the member’s investment account (such as an investment process that reduces market risk, enhances return, or both).
[ibid. p. 5]
A significant source of dissatisfaction recorded in the Report arose from poor advice and services, including lack of information and communication. Conversely good customer service was ranked highly as a reason for member satisfaction. Unusually, given how much KiwiSaver providers invest in online services and tools, members surveyed did not give high weighting to this type of service provision as a reason for satisfaction.
According to the Report, about one third of KiwiSaver members think their fees are too high, which is consistent with previous biennial reports. The members most concerned about high fees are those invested in conservative funds, whereas those invested in aggressive funds are least concerned about being overcharged. The Report links dissatisfaction over fees with poor investment returns during the past two years. One explanation could be that members in conservative funds are more likely to be loss-averse than those in aggressive funds, and accordingly more critical of weak fund performance and the fees they are paying, notwithstanding that conservative fund fees are typically lower than aggressive fund fees. This insight points to the need for nuanced understanding of how different types of investors weigh up the costs and benefits of the particular funds they put their money into.
When the VfM-specific graphical analyses are examined, a bit over half the KiwiSaver members surveyed perceived that their scheme’s VfM was good or very good. Around a third were neutral, while approximately one tenth perceived VfM to be poor or very poor. Another one in twenty did not know whether their scheme represented VfM. These proportions varied somewhat depending on whether the KiwiSaver scheme provider concerned was a bank or a non-bank, or the fund was default or non-default.
Delving into VfM per KiwiSaver fund type – aggressive, growth, balanced and conservative - about two thirds of the members of aggressive and growth funds were satisfied with the VfM they perceived that they were getting, whereas only around two fifths of members of balanced or conservative funds felt the same way. Conversely, dissatisfaction with VfM was highest with conservative fund members and dropped away successively for members of balanced, growth and aggressive funds. The higher the proportion of growth assets in a fund, the lower the level of VfM dissatisfaction. The Report had already noted a link between fund performance and VfM dissatisfaction responses.
When considering how VfM has changed over the past year, only one in fourteen KiwiSaver members surveyed thought it had become better, whereas four in ten felt it had got worse and a similar proportion believed it had stayed about the same. For those members who ranked their KiwiSaver scheme poor or very poor at delivering VfM, almost four out of five stated that VfM had become significantly worse over the year past. It appears that once members come to think of their KiwiSaver as not providing VfM, they may become predisposed to intensifying that view with the passage of time.
When asked to weigh up VFM influences on choosing a KiwiSaver provider, low or simple fees were the leading factors, chosen by nearly three quarters of survey participants. Performance returns of the fund were backed by three fifths. About one third supported both reputation of the KiwiSaver provider and active management of the fund. Coming in next was around a quarter choosing quality of communications and advice offered. After that at around one in five members came ethical investments in the fund and ethical/socially responsible management of the fund, with the tail end being personal engagement with the member at approximately one in six and passive management of the fund at one tenth.
A final VfM-related graphical analysis reveals that the leading reason for switching KiwiSaver providers among the members surveyed is if the fees seemed too high, picked by just under half, followed by if another provider achieved better investment returns, at two fifths. In line with the Guidance’s first key principle, fund fees and performance appear to be top of mind with KiwiSaver members. A reasonable inference would be that if a similar survey were conducted on members of non-KiwiSaver MISs, then similar results would be discovered.
Fund managers who are required to perform VfM assessments by 30 June 2023 could do well to contemplate the findings of the Report and in some way compare and incorporate them into how they assess the VfM propositions represented by their own funds. A next step could be to emulate the FMA’s example and commission surveys of their own customers, including KiwiSaver scheme members, to find out how they actually perceive the VfM on offer through the funds they have invested in. Findings from such surveys could be incorporated as evidence into VfM assessments.
The template for such surveys is already supplied by the Report, including the implied questions behind the graphical analysis pages, although that is not necessarily the last word on how such surveys could be conducted to bring out the best information on customer perception of managed fund VfM. The survey answers received could provide empirical bases for fund managers to develop and refine VfM assessment methodologies. Of course, aspects of VfM perception might still vary legitimately between MIS managers and their scheme members and investors. For example, a MIS manager might consider certain technical points about how it manages its offerings as evidence for providing genuine VfM, whereas the average investor might not see the purpose or value of the same. It would be open to the MIS manager to build the case for why some of the more arcane features of its activities translated into true extra value for its investors.
As a further step still, and in line with the Guidance’s encouragement for fund managers “to report the results of the [VfM] reviews to their members in an appropriate form”, the Report provides a model for how this might be done effectively. The information gathered by the VfM assessment tool would need further translation into something like the readily understood format of the Report and published to scheme members and even the wider public. Those MIS managers who are actually providing VfM through their managed fund products surely have every reason to want their scheme members and potential investors to know about and appreciate that.
“The FMA’s latest biennial survey report, KiwiSaver Statements (Report), is very timely within the context of commencement of the first round of VfM assessments by MIS managers,” said Matthew Band, General Manager of Corporate Trustee Services at Trustees Executors.
“MIS managers, including KiwiSaver providers, will be needing to come to grips with how they interpret the VfM propositions that their managed funds represent.”
“The Report helpfully sets out how members of KiwiSaver schemes can be surveyed in order to discover the ways in which they perceive VfM in relation to the funds they are invested in and has wider potential applications across the funds management industry.”
“As part of the evidence gathering required in preparation for completing the VfM assessment tool, at least some MIS managers might have sufficient time to conduct customer surveys in the first round.”
“Going forward, it could ideally become a regular exercise for MIS managers to complete customer VfM surveys before formal self-assessments are finalised to present to Supervisors for review.”
“The questions asked in such surveys would need to be objective, impartial and unbiased, with customer samples large and representative enough to generate robust statistics such as the Report has published.”
“As the FMA has done, it could be prudent for MIS managers to hire external professional public survey companies in order to acquire the best evidential results from their customers as to the kind of VfM proposition their funds offer.”
“Like the FMA, as a Supervisor we would encourage our MIS manager clients undergoing their first round of VfM assessments to consider how to publish the results to their investors in an appropriate form and to adopt the practice as standard in the years following.”
“The Report provides a model for how this might be done, not just to communicate the degree to which VfM is being provided to investors by the authoring MIS manager, but also to provide a service of additional value in itself.”
“We would anticipate that such VfM reports to investors would represent a most significant step to improving financial literacy and imparting greater confidence in New Zealand’s financial markets.”
For comment or more information, or to be added to the free email subscriber list of “The Supervisor”, please contact Matt at [email protected].