Keeping tabs with KiwiSaver standards

As KiwiSaver gains prominence in New Zealanders' retirement savings planning, the need to compare providers' results on a consistent, reliable basis becomes more important.

There is a set of Global Investment Performance Standards (GIPS) which is designed with the specific aim of enabling the investment performance of competing products to be directly compared.

GIPS is an initiative of the CFA Institute, the pre-eminent sponsor of investment market integrity throughout the world and best known for its role in educating investment professionals, maintaining high professional standards and administering the CFA charterholder programme.

The GIPS standards are a set of standardized, industry-wide ethical principles that provide investment firms with guidance on how to calculate and report their investment results to prospective clients.

The key intent of the GIPS standards is to prohibit managers selectively reporting only their superior investment returns and to provide a consistent basis for comparing managers.

The GIPS standards have now been sponsored as best practice in 31 countries including New Zealand.  Investors can rely on the performance presentations given by GIPS-compliant firms.

Claiming compliance with the GIPS standards demonstrates a firm-wide commitment to ethical best practices and that the firm employs strong internal control processes.

The GIPS standards require (among other things):

• All similarly managed accounts are to be included in the performance calculation rather than selecting individual accounts;
• Returns are to be calculated using a time-weighted methodology that removes the effects of cash flows on the return;
• Annual returns must be reported for each year separately;
• Whether fees are included in the calculation must be clearly stated;
• The return on the investment's benchmark must also be provided;
• A measure of the risk of the investment must be provided.

KiwiSaver accounts include a subsidy from the Government. That subsidy cannot be claimed as part of a KiwiSaver providers' investment return. It is suggested that investment return presentations clearly state that Government subsidies are excluded.

Investors need to demand KiwiSaver managers adopt the GIPS standards. Managers need to go one step further and have their performance presentations verified as being GIPS compliant.

Widespread use of GIPS will benefit the savings industry by providing reliable, robust and comparable returns presentations.  It will benefit managers, as clients gain confidence in their offerings and as their own processes conform to global best-practice standards.

Ultimately that can only be to the benefit of the KiwiSaver investors and the Country.

For more information see www.gipsstandards.org.

[Technical note: Investment managers often have no control over when cash flows are received or paid out. A time-weighted methodology for calculating returns removes the effects of cash flows on the return by re-valuing the portfolio at the time of a cash flow and calculating the return for that sub-period.  Returns over multiple sub-periods (for example, a year) are obtained by multiplying the returns for the component sub-periods together.  The GIPS Standards permit approximations to the pure time-weighted methodology such as the Modified Dietz calculation method. However from 1 January 2010, the GIPS standards require portfolios to be revalued on the date of large cash flows (the definition of "large cash flows" is left up to the investment manager)]

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