Govt moves to allow early KiwiSaver withdrawal

Government is exploring its options to allow people with life-shortening conditions to access their KiwiSaver money earlier.

Two independent advisers, Claire Matthews from Massey University, and the IHC's Donna Mitchell, will help Commerce and Consumer Affairs Minister Kris Faafoi find the best solution.

Faafoi met with Down syndrome man Tim Fairhall earlier this year, who drew attention to the issue of people in situations like his.

People with Down syndrome have a shorter life expectancy and Fairhall said he wanted to be able to use his KiwiSaver money to travel overseas.

“KiwiSaver helps New Zealanders enjoy the best retirement they can,” Faafoi said.

“Part of the success of KiwiSaver as a retirement savings scheme is because funds are not available until the age of 65, so the savings grow and help people considerably towards a financially secure retirement.

“However, it’s important KiwiSaver works for all New Zealanders. Tim has Down Syndrome and is aging prematurely. He hopes to retire in his mid-40s and access his savings – but at the moment, he can’t.

“I think it’s fair and just that New Zealanders who have been paying into KiwiSaver throughout their working life should expect to one day enjoy the benefits of their savings in their retirement – be that at 45 or 65.”

At present, savers can only access their money for a first home or in serious of sever financial hardship.

”I think we have to acknowledge that the one-size fits all retirement age does not work for this group faced with life-shortening conditions – so we are going to fix that,” Faafoi said.

“Dr Matthews and Ms Mitchell have been tasked with looking into how special circumstances could cater for people like Tim, enabling them to withdraw their money at the point at which they choose to retire.

“The two advisers will consult with people who are faced with this issue, with medical practitioners and KiwiSaver experts, before reporting back to me in early 2019.

“It is a technically complex area so I can’t promise a quick fix for Tim personally but I am going to move this forward because this Government is committed to ensuring its policies work for all New Zealanders.

“Everyone deserves the right to use the money they have saved for their retirement.”

Advice is expected back to the Minister by the end of February. Changes to the KiwiSaver withdrawal criteria would require legislation.

KiwiSaver tracker an own goal?

If the Financial Markets Authority's KiwiSaver Tracker was designed to make investors wary of higher-fee funds, it is not achieving its goal, one fund manager says.

The FMA has updated its KiwiSaver tracker, which shows fees as a percentage of funds' five-year average return.

Aggressive funds ranged from Mercer High Growth's 7.9% of return paid in fees to 17.2% for Booster's Geared Growth fund and 23.5% for NZ Funds Growth Strategy.

Growth funds varied from ASB's 5.5% to NZ Funds' Inflation Strategy's 21.3%.

Cash funds had high fee-to-returns ratios because their returns were so low.

When it was launched, the FMA said the tracker made it clear that there was no evidence that paying a higher fee got a better return.

But Booster's outgoing chief investment officer David Beattie said that was now not so clear.

He pointed to the scatter plot with the data which shows that all the lowest-fee providers have after-fee returns at 5% or below. 

The best performers in the market hit more than 15% over five years.

The highest performers after fees over the five years were the Quay Street New Zealand equity fund (15.1% return, 1.3% fee, OneAnswer International Share fund (14.5% return, 1.1% fee) and OneAnswer Australasian share fund (14.4% return, 1.1% fee).

“At best there’s no relationship and when all the funds are together there’s potentially a positive correlation between fees and returns. We wouldn’t disagree with that.”

The most expensive KiwiSaver fund was the Lifestages Growth Portfolio, at 2.8% fees and a return of 9.1% after fees and NZ Funds Growth Strategy with 2.7% fees and 9.9% returns.

Booster’s Geared Growth fund also had fees of 2.7% but Beattie said that would soon change because it would no longer have to include its interest costs as part of the calculation. The fund borrows to leverage up its total exposure to equities. “They are not fees paid to us, they go to the bank as part of funding the facility.”

That would cut the fees recorded in half, he said. 

Beattie said the onus for anyone charging fees that were higher than the average was to justify how they were adding value.

“If you aren’t you will go out of business because investors will go to those who are better at proving they are adding value or who say they offer cheap fees and don’t add a lot of value. The evidence does not support the proposition that the higher the fee the lower the return after fees.”

He said when funds went into negative returns the percentage calculations would look meaningless.

“It’s useful to plot the return versus fees but not to portray it as a percentage.”





Knowledge still lacking on KiwiSaver

New Zealanders still have a lot of unanswered questions about KiwiSaver, a new survey shows.

The latest ASB KiwiSaver survey shows that 63% of respondents said they needed to save more for retirement and 18% were unsure.

But many did not know what was an appropriate amount to be aiming for.

A full 17% of respondents were unsure how much saving would be required each year in retirement.

A fifth thought the amount required per year was less than $30,000 while another 31% thought a figure between $30,000 and $50,000 each year would be needed. A remaining quarter thought that more than $50,000 per year would be required per year of retirement.

Four in 10 of respondents planned to use KiwiSaver to cover day-to-day expenses and provide income within retirement, and 11% planned on leaving the money in KiwiSaver once retired. Another 11% of people planned to use KiwiSaver to pay off mortgages or other debt.

“With good returns a key reason for satisfaction, markets remaining volatile, and KiwiSaver knowledge still low, the survey highlights the importance of good financial planning and seeking advice to help with all the uncertainties,” ASB wealth economist Chris Tennent-Brown said.

“At times like now when sharemarkets are volatile it’s especially important to seek help if investors are unsure what they should be doing."

Retirement decisions based on science not spin

KiwiSaver is rapidly proving as much of a bonanza for the marketing industry as it is for the wealth management industry

Some providers are spending seven figures annually to promote their various investment propositions. And as one would expect, if you let the ad executives loose, the key messages are, well… “loose”.

In addition to surveying clients to determine what they want out of KiwiSaver (see Good Returns article “What New Zealanders want from KiwiSaver may surprise you”), NZ Funds has been researching what really determines how much money a KiwiSaver member retires with. The answers are logical and intuitive to
long-term practitioners of financial advice, but will no doubt come as a shock to fans of Mad Men. 

To answer the question: “What matters most in maximising KiwiSaver by retirement?” the NZ Funds Wealth Technology Team started with an 18 year old on the average full-time youth earnings of $38,324 per annum. The 18 year old’s earnings increase by 3% each year until they retire at age 65. In this way
they approximate the national average wage of $68,588 per annum (with adjustments for expected inflation). The impacts of different variables were measured, holding all other factors constant.

Asset allocation is the largest single determinant of retirement wealth (which will come as no surprise to financial advisers). Re-orientating a portfolio from 100% Income (default) to 100% Growth adds an additional $950,000 by retirement. Obviously, this comes with a higher level of volatility which may not match the investor’s risk appetite. Interestingly, even a transition from 100% Income (default) to a diversified portfolio of 40% Income and 60% Growth, increases the terminal value by $429,000, while a life cycle process can add as much as $931,000.

The second most powerful determinant of retirement wealth is a member’s contribution rate. Assuming an employer contribution of 3% before ESCT tax throughout, an increase in the employee’s contribution rate from 3% (the current statutory minimum) to 10% (the proposed statutory maximum from 1 April 2019, which together with the employer contribution approaches the Australian 2025 compulsory savings level of 12%), results in an additional $778,000 by retirement.

Manager performance can also meaningfully contribute to, or detract from, a client’s final retirement sum. Assuming performance bands of plus or minus 0.5% per annum for Income and plus or minus 1.5% per annum for Growth, for the entire 47-year period, manager performance either adds $347,000 or deducts $243,000.

The research shows that fees rank fourth. We took the difference between the lowest and highest fees charged by a Balanced fund (0.4% and 1.4%). The difference by retirement is $164,000. This is without doubt a considerable sum, but is meaningfully less than the value that can be added in the other ways that the team identified.

Some things are in neither the investor’s nor the manager’s hands, such as bull or bear markets. Fortunately, for most members, their time in KiwiSaver is long enough that they are likely to experience both over time and end up with the average. However, the order in which they come makes a meaningful difference. Those fortunate enough to enjoy a strong market (defined as neutral interest rates, credit spreads and real equity returns all 50% higher than average) from age 42 to retirement, after experiencing a weak market (defined as neutral interest rates, credit spreads and real equity returns all 50% lower than average) from age 18 to 41, accumulate $547,000 more than investors who experience a strong market between age 18 to 41 and a weak market thereafter.

Finally, there are a growing number of studies which seek to quantify the value an adviser can add.

NZ Funds measured the benefit of a personal financial plan and regular portfolio reviews by comparing two outcomes. The first, for an investor who at age 53 switches from Income (default) to Growth near the end of an expansion, and then panics at age 57 and switches from Growth to Income (default) after a period of investment market volatility. The second, for an advised client who stays the course with a diversified portfolio of 40% Income and 60% Growth. All other things being equal, the advised client retires $403,000 wealthier.

A surprising outcome of the research is that it shows investors are more in control of their retirement wealth, through asset allocation and their choice of savings rate, than the investment manager who determines fees and manager performance. And as with most things in life, fate also has a role to play in determining whether investors enjoy strong returns earlier or later in life.

The research also suggests that the resources deployed to build and maintain government funded sites, such as which predominately focuses on fees, would be better deployed illustrating the merits of growth-orientated investments over the long term, and encouraging New Zealanders to select
a higher contribution rate. The requirement from next year for all KiwiSaver Annual Member Statements to illustrate the merits of different savings rates to investors is a meaningful step in the right direction.