KiwiSaver

A group of financial advisers says big banks are using KiwiSaver to line their pockets.

The group wants changes to the way default KiwiSaver schemes operate.

The group is made up of John Cliffe, Phil Ison, Alistair Bean, Rachelle Bland,  Michael Lay, John McLean, John Milner, Tony Walker and John Wood.

The group wants all default funds to be balanced options, to ensure IRD gives default managers the correct tax rates for members, to remove all members in a default fund after 12 months by switching them out, and to introduce a white-labelled government balanced fund for those members.

New default member flows should be stopped to any default provider that did not meet specific engagement and switch-out rates for members and the white-labelled fund should be told to minimise investments in Australian-owned bank securities, the group said.

Fund managers with conflicts of interest in security selection should be investigated and management fees should be refunded when they were charged for placing and keeping investments in their own issued securities.

The group also wants explicit identification and disclosure of conflicts to members.

It estimates  $1.5 billion of KiwiSaver funds are invested in securities issued by Australian-owned banks and insurance companies.

“The problems with default KiwiSaver funds are systemic and long-standing,” Cliffe said, speaking on behalf of the group.

“They are well-understood, yet little of real substance has been done to resolve them by those involved, including the banks and insurance companies, the Financial Markets Authority, the Reserve Bank of New Zealand or successive governments.” 

He said the government’s decisions to keep default funds conservative rather than balanced has resulted in default members missing out on approximately $830 million over the six years ended March 31, roughly $2.7 million every week.

Many of the lowest-income earning KiwiSaver members are paying tax at the highest possible rate of 28%, when they should have been taxed at 10.5% or 17.5%.

The IRD supplies default KiwiSaver funds with default member account details but not the member’s tax rate, so unless a fund successfully contacts members and gets their tax rate, it is required to deduct tax at 28%, the maximum rate. This problem is likely to have affected the majority of those who have been enrolled in a default KiwiSaver fund.

The group said the real winners in the scheme were Australian-owned banks, which had been able to invest the default funds in their own and each other’s securities.

As at March 2018 this amounted to 31% of the ASB’s default fund, 30% of ANZ, 31% of BNZ, 27% of Westpac and 34% of AMP. If a balanced fund option for default funds was implemented, the exposure to Australian-owned bank securities would decrease by approximately $1 billion. The banks charge KiwiSaver members management fees for investing their funds in this way. 

“The FMA, Government Ministers and others responsible for overseeing KiwiSaver have frequently asserted that better financial literacy education of default investors is required along with better fund manager performance in switching out default members to solve the problem,” Cliffe said. “After a decade of failure with this approach it is time to take action.”

Why have so few employers chosen a preferred provider scheme?

The March 2017 FMA KiwiSaver Annual Report showed that 20,004 employers have a preferred KiwiSaver scheme. As IRD records show that over 200,000 companies deduct PAYE, this suggests less than 10% of all employers have a preferred scheme.

This is lower than was originally intended when KiwiSaver was first introduced. But is it leaving New Zealanders worse off or does it not matter?

In the United States, United Kingdom and Australia, employers are required to select a licensed manager at the outset. In New Zealand it was contemplated that after an introductory period which was designed to build confidence in KiwiSaver, both employers and employees would transition from the default regime to selecting a scheme that best aligned with their objectives.

Ten years on, this is exactly what has transpired, with employees at least. Of the 2.8 million (1) New Zealanders who have been enrolled in KiwiSaver (1), only 16.4% (1) are currently in a default fund.

Despite a general agreement that these funds are not appropriate as a long-term savings option, new members are still directed to these funds.

Under the existing rules, if an employee does not select a scheme and their employer does not have a preferred provider, new employees are randomly allocated across the nine different default schemes.

These different default schemes are mandated to have a high allocation to income.

This process is far from ideal from the employee’s perspective. In many cases they receive little or no guidance, they may end up in an inappropriate fund, and there is the high inconvenience of switching. 

From the employer’s perspective, no employer wishes to be seen endorsing one manager over another in case that manager does a poor job.

Anticipating this, the KiwiSaver Act 2006, Financial Advisers Act 2008, and Inland Revenue’s website, state where an employer chooses a scheme they will not be held responsible if the scheme fails. In addition, all schemes are subject to the same regulatory oversight and no scheme is guaranteed by the government, regardless of whether they are a default scheme or not. 

Nevertheless, whether an employer is legally on the hook or not, employees may still hold their employer morally accountable for selecting one scheme over another, and therein lies the rub.

Interestingly, many employers have chosen a “preferred” healthcare provider; “preferred” insurance provider or “preferred” banking relationship.

In most cases they have done so because by aligning with a single provider their employees receive additional value in the form of a discounted price or a higher level of service.

In KiwiSaver, employers may be forgoing the opportunity to offer their employees complementary personalised financial advice, financial planning software, regular financial guidance seminars, dedicated call centres and management reporting which can answer questions such as: “What percentage of your employees feel confident about their retirement preparation?”.

Over time, the issue may well end up being resolved by employees themselves.

For employers, attracting and retaining high quality motivated people is difficult.

Some employers will take full advantage of every comparative advantage they can get, from gym memberships to health and life insurance, banking services and ultimately the additional services and products KiwiSaver providers are willing to offer in order to win “preferred provider” status.

As KiwiSaver balances grow, so too will the perceived value of complementary personalised financial advice.

Access to an Authorised Financial Adviser may seem inconsequential to an employee when their KiwiSaver balance is in the thousands, but as balances climb into the hundreds of thousands and in some cases millions, so too will the value they place on advice.

We can therefore expect the more competitive and entrepreneurial organisations to be the first movers in the preferred provider space.

Interestingly, there do not appear to be enough qualified financial advisers (or schemes for that matter) to provide a full service offering to all of the 180,000 firms yet to align themselves with a preferred provider.

It is therefore not inconceivable that, over time, employers find the best schemes are “closed” to new preferred provider relationships. Like in most aspects of business, there will be risks in moving early, but there should also be rewards.

1. http://www.kiwisaver.govt.nz/statistics/annual/ April 2018.

A new bill hopes to address low contribution rates in the retirement savings scheme.

The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill has been introduced to Parliament, introducing enhancements to KiwiSaver in line with the Retirement Commissioner’s December 2016 review of retirement income policy.

Among the changes it would introduce is a move to allow people over 65 to join the scheme, to give them access to KiwiSaver as a provider of low-cost managed funds through retirement.

It would also remove the lock-in period that requires people over 65 to stay in for five years before they withdraw their money.

Both changes would come into force next July if the bill is passed.

At the moment people over 65 cannot join KiwiSaver or move to a new scheme, although they can continue to contribute to their accounts if they are already a member.

People who want to withdraw their money have to wait – a rule that was designed to stop them joining simply for the $1000 kickstart, which has since been removed.

Other changes, which the bill would bring into force in April, include new contribution rates of 6% and 1%, reducing the maximum contributions holiday that people can take from the scheme to one year, and renaming that holiday a “savings suspension”.

In its regulatory impact assessment, Inland Revenue said the changes should address low contribution rates and long contribution holidays being taken by KiwiSaver members.

In the year ended June 31, 2017, 131,710 members were on a contributions holiday. Almost 85% were for five years.

“Stopping contributions for five years has a significant impact on members’ savings, and also means members generally do not receive the member tax credit or employer contributions during this period,” Inland Revenue said.

“The purpose of the contributions holiday is to ensure members can take a break from making contributions when they are not in a financial position to do so. However, having a default five year contributions holiday period is likely to be longer than necessary for many members (whose financial position is likely to improve in the interim period).”

It said the new contribution rates should help savings rates and give more flexibility for members.

“The additional 6% rate would also address the gap between the current 4% and 8% contribution rates, which the Review indicated many members think is too large. This view is supported by the fact that 24% of members contribute at the 4% rate, but only 9% of members contribute at the 8% rate.”

 

Investors who work with advisers are on track to achieve better outcomes in their KiwiSaver accounts.

Data from ANZ and Booster shows that KiwiSaver members who work with advisers have more allocation to growth assets.

At Booster, investors aged between 17 and 32 have 30% higher exposure to growth assets, which chief investment officer David Beattie said was due in part to the effect of unadvised default members ending up in conservative funds.

But even between age 33 and 60, members with an adviser had 15% allocation to growth.

“The risk profile of average advised members from 40 to 65 becomes more risk averse as they get older, which is what you would expect,” Beattie said.

“However, the average unadvised member’s risk profiles for 40 to 65 is not changing and in fact strangely spikes up at the end.”

He said the flat average risk profiles of advised members aged 15-35 would be more aggressive and more downward sloping were it not for first-home withdrawals. 

“That supports the hypothesis that they are being advised well.”

At ANZ, general manager of wealth products Ana-Marie Lockyer said, when default clients and those in lifetimes funds were taken out of the mix, the data showed that there was a higher bias to growth funds, either diversified or single sector, in the One Answer KiwiSaver fund for members with advisers.

“That seems to be prevalent at all age groups except 26 to 35 when they are more likely not to have  a bias to growth because they tend to be saving for a first home.”

The biggest difference was in people aged over 46, she said.

Over an investor’s lifetime, more exposure to growth assets should lead to better outcomes.

Beattie said there was still not strong demand for KiwiSaver advice. Booster has now sent out two years of statements with a forecast lump sum and indication of the retirement income that could be expected.

“We through that might be a catalyst for clients with advisers to contact their advisers and ask ‘what can I do to lift that’ but there has not been a lot of engagement, It’s not quite at the forefront of their minds.”

He said it might not e until average balances hit about $30,000 that people became more concerned.

Chris Douglas, director of manager rating research at Morningstar Asia-Pacific said advisers could also be expected to help clients stay the course when markets were shaky, boosting their returns.