Australia shows how fund managers can be held to account

Your KiwiSaver balance may not have sparked much joy lately. Billions have dropped off accounts this year. Commentators tell us not to panic: KiwiSaver is a long-terminvestment and there will be ups and downs along the way. Weather the storm, they say.

It’s advice that’s all well and good in general – and doubtless comforts fund managers who may fear an exodus of investors as balances take a hit.

But things are a bit more complicated if you’re trying to decipher how your KiwiSaver fund stacks up with the rest of the market, and whether it’s worth sticking with for the long haul.

Latest data indicate many funds are underperforming against market benchmarks.

In the year to March, only about a third of funds delivered better returns (after fees) than the benchmark chosen by the fund manager for comparison.

It’s not a one-off event either. In a report released in May, the Financial Markets Authority pointed out that returns after fees are typically not matching or outperforming market benchmarks ‘‘over meaningful periods’’.

In other words, many of us are likely to be getting questionable value for money, even when economic times are rosy.

Anyone trying to weigh up their KiwiSaver options is usually told to check they’re in the ‘‘right’’ type of fund – depending on howmuch risk they’re prepared to tolerate – and shop around to make sure they’re not paying too much in fees.

But there are limits to shopping around in this market. With 30-odd KiwiSaver providers, offering 300 different funds, financial comparisons aren’t exactly straightforward.

Across the Tasman, regulators have twigged that it’s a tall order to leave it to consumers to find their way around the superannuation market.

Super funds there are now subject to an annual performance test, which results in a pass or fail grade. Names of funds that have failed are published.

Companies that receive a fail grade also have to notify their members within 28 days and put the results on their website. Funds that pass the test only marginally are also named.

The performance test adopted by the Aussies compares a fund’s net returns for an eight-year period, as well as its annual fees, against a market benchmark.

Naming names has been credited with shaking up the industry – and giving investors information they can actually use.

Across the 13 products that failed the first performance test in 2021, about 100,000 members walked away, taking $4 billion in funds with them.

Things are a lot different here. Despite regular hand-wringing about the state of the market and how tomake providers lift their game, efforts have stopped well short of an annual performance test similar to Australia’s.

Current KiwiSaver rules go as far as requiring companies to disclose how returns compare with amarket benchmark – but it’s a benchmark of the company’s own choice.

As the FMA has previously found, some use ‘‘inappropriate’’ benchmarks. To sugar-coat returns, these funds pick a benchmark that casts their results in a more favourable light. They can then charge investors extra fees for the fund’s allegedly superior performance.

However, the culprits haven’t been named and changes to toughen the rules aren’t on the table. Instead, it’s amuch more softly-softly approach to fixing problems.

For its part, the FMA has been providing guidance to companies on how tomend their ways.

A ‘‘self-assessment tool’’ has also recently been rolled out for funds to measure their own value for money. The authority says it expects them to now be doing this annually.

But as Australia has found, optimism that voluntary measures will be a panacea is likely to prove misplaced.

In the meantime, investors are largely on their own when it comes to the weary task of rating KiwiSaver offerings.

Despite the scheme being in place for 15 years, easy to use information about which provider is more likely to deliver on your retirement dreams remains hard to find.

JessicaWilson is a researcher and writer who works on consumer law and other issues.