Many providers think KiwiSaver a slow earner

Photo / The Aucklander

More KiwiSaver providers expect it to take longer than two years to recoup the costs of setting up the scheme and fewer expect to become profitable over the next 10 years.

A report released by the Ministry of Economic Development evaluating the supply side of KiwiSaver found 60.9 per cent of providers believed their payback period would be eight years or less. That's down from 91 per cent in a similar survey in 2008 by PricewaterhouseCoopers.

It also shows 83.4 per cent expect they will be profitable over the next 10 years, down from the 91 per cent who believed it in the 2008 survey.

The ministry's report said profitability had been squeezed by corporates having to make considerable capital investment to get started and it was likely to take some years to recover because operating margins had been kept down through competition and monitoring by the Government Actuary.

"The decision to reduce the minimum contribution rate from 4 per cent to 2 per cent will affect the accumulation of funds under management which is the major driver of revenue for providers," it predicted.

While take-up of KiwiSaver had been strong - so far more than 1.5 million people have signed up - account balances remained low with the average at just under $5000 as of last December 31.

The report also found some larger banking and insurance providers felt they had to enter the KiwiSaver market because it was seen as the future of retirement savings, even though it had marginal profitability.

"Entry was difficult for some providers to justify in terms of a financial business case. However, they did it because they thought they had to for competitive reasons."

But development costs had turned out to be higher than expected because of the number of changes made since the launch of KiwiSaver.

The ministry said that over the long term there would be good business for providers via a stable and growing market but it would depend on providers' ability to promote their KiwiSaver scheme.

However, its survey found because many schemes were not yet profitable they were not being promoted much at all.

"For some of the largest providers the revenue from KiwiSaver is insignificant compared with other parts of their business and, as a result, it does not attract much attention or resources. Some smaller providers also struggle with the overall viability of their business."

Profit margins across big providers and medium providers were estimated to be between 7.7 per cent for the ASB and 25 per cent, the highest being Gareth Morgan's KiwiSaver scheme.

The ministry said although the margins were positive they were generally not very high given the set-up costs.

"In comparison, the profit margins for some of the major providers' regular superannuation products on a comparable basis are approximately 20 per cent."

The survey found some providers did not believe they would ever make a profit from KiwiSaver and would eventually leave the market.

Consolidation has been widely expected in the KiwiSaver industry but so far three schemes have left and three have been launched since it began in July 2007. The report found 79 per cent of those surveyed believed there would be a decrease in providers over the next three years.