How small KiwiSaver providers are reducing costs to stay competitive

Large KiwiSaver providers have been quick to criticise the sustainability of smaller providers but due to the growing demand of IT outsourcing these smaller providers no longer need to invest in their own infrastructure.

Last week, ING and Tower told NBR the main costs of KiwiSaver were administration and IT. Both ING and Tower are large providers of the scheme and have questioned whether small providers will be able to offer the scheme in the future.

KiwiSaver has been designed to be a low-cost long-term savings vehicle for New Zealanders and many banks; asset management and insurance firms around the country are offering customers the opportunity to invest their KiwiSaver dollars in their funds.

There are more than 50 providers currently running KiwiSaver funds and some providers such as ING and Tower believe that is too many, and that over the next few years there will be a process of consolidation amongst these providers.

Gareth Morgan KiwiSaver director Andrew Gawith said he agreed change within the scheme, especially amongst IT, would be constant. However, he strongly disagreed with the notion smaller schemes would be forced to slash KiwiSaver from their product lists.

“The most interesting point is the cost-plus mentality that pervades this industry. If schemes do pass on the cost of these ‘changes’ to members (and that seems to be common practice) then I accept that the small providers may well be imposing higher costs per member than larger providers.

“But I assume not all [small] providers take a cost-plus approach.  All the costs incurred in running our scheme, are covered by the 1% fee we charge members (subject to the $50 per annum minimum fee). No additional costs or expenses are charged to the scheme.

“The problem with passing on costs to members is that members never really know how much they are paying in fees, the headline fees are potentially well short of what’s actually charged.” Gareth Morgan KiwiSaver has about 40,000 members.

Fisher Funds currently has about 15,000 members compared to ING which has more than 260,000 members, founder Carmel Fisher said IT costs were not a serious issue for the company as it outsourced its IT systems to Trustees Executive.

New technologies such as virtualisation and cloud computing are allowing companies, especially smaller ones, to be more flexible in the way they manage their businesses. Companies no longer need to own expensive IT platforms and continue to pay for maintenance and upgrades, and more and more companies are outsourcing to providers that sell their services on a pay-as-you-go model.

Ms Fisher said this way, the fund received all the benefits of a third party administrator but did not need to invest in capital expenses in terms of IT infrastructure and updates such as software. “I don’t think (IT costs) are going to be a big deal (in the long-run). It hasn’t been as big as anticipated, and there hasn’t been as much consolidation. A lot of small to medium sized providers are outsourcing.

“I think it is an understatement to say that small providers will struggle to run the scheme. The main issue is serving costs and the costs associated with that. I don’t think there is going to be a lot more (IT) change,” Ms Fisher said.