KiwiSaver product disclosure statements
KiwiSaver product disclosure statements: short and sweet, or just short?
KiwiSaver investors are dealing with less financial jargon but still need to be well educated to make sense of one of the key documents sent out by providers.
Research by Associate Professor Aaron Gilbert and Dr Ayesha Scott at AUT Business School Department of Finance has shown, on average, the product disclosure statements – an important source of investment information – are significantly shorter and contain simpler language when compared with the prospectuses and investment statements they replaced.
Changes to KiwiSaver regulations meant from mid-2016 KiwiSaver providers were required to deliver information in a format that a “prudent but non-expert person” could understand, which led to the introduction of product disclosure statements as the preferred form of investment communication.
But even the simplified product disclosure statements require a high level of literacy, say the researchers.
“On average, simplified disclosure has made these documents easier to understand for our average New Zealander who is thinking about or invested in KiwiSaver,” says Dr Scott.
“This means there is less specialised jargon used in a product disclosure statement in comparison to the previous prospectus document. However the results were a little mixed in that the average level of education needed to understand the general text is a little bit higher now.”
Associate Professor Gilbert says given the uncertainty around the future of national superannuation, KiwiSaver will become a major component of people’s financial future.
“Because it is so important and because small decisions made today can have a huge impact 30 or 40 years from now in terms of how much money people have to retire on, it’s really important people are making good decisions when it comes to their KiwiSaver.
“The first step in making those good decisions is to get people actively seeking information.”
Associate Professor Gilbert and Dr Scott compared the last prospectus produced by 21 KiwiSaver providers with their new simplified disclosure documents to provide a before and after snapshot of the effect of the regulation.
A number of measures were used to evaluate the readability of the documents including the complexity of the language used compared to common, everyday plain English words and the number of specialist financial terms included.
The next stage of the research is to get people to sit down and interact with the product disclosure statements to see what impact the simplified documents have had on people’s financial understanding and to try and figure out where improvements can be made, says Dr Gilbert.
“The measures that we’ve come up with so far around readability are quite objective measures that give us a numerical basis for saying whether there has been an improvement or not.
“I guess the ultimate test is whether people can actually understand these documents better,” he says.
• Product disclosure statements are shorter – approximately 16 pages compared to the 80-plus pages of the average prospectus.
• Average sentence length has increased with the introduction of product disclosure statements, from nine words per sentence in the prospectus to 16 words per sentence in the product disclosure statement.
• The average Fog Index (a measure of readability) has increased from 10.3 to 12.5, suggesting investors need the equivalent of a Grade 11 to university entry-level education – a high level of literacy for a document designed for a general New Zealand audience.
• The language used in the product disclosure statements is simpler and contains fewer specialised finance terms, suggesting regulation has had an impact on the readability of investment disclosures.