Industry opts-in to KiwiSaver

Bemused delegates at last month’s Superfunds Conference in Wellington heard how KiwiSaver might revitalise the savings industry or just waste everybody’s time (and money). David Chaplin reports.

So it won’t become compulsory, according to National’s finance spokesman, Bill English, but the industry is, almost begrudgingly, preparing for KiwiSaver anyway.

English dropped the non-compulsion bombshell at last month’s Conferenz Superfunds Conference in a speech that included some damning observations of the managed funds industry.

But as many in that industry have quietly been assuming that the opt-out KiwiSaver system was the first, not so stealthy step towards compulsion, English claimed political pragmatism would ensure New Zealanders would not be forced to save for retirement.

He said the country has repeatedly come out against compulsory superannuation and any party favouring it could stand to lose 800,000 votes. “I’m sure if you asked Michael Cullen [current Finance Minister and deputy Prime Minister] he would say the same thing. There’s a kind of a mutually assured destruction pact that compulsory super won’t happen,? English said. “My party has spent 15 years on the wrong side of this debate and suffered mortally for it.”

His forceful stand on the matter appeared to contradict some earlier statements from the National’s leadership and rumours are circulating that compulsory superannuation is still on the party’s agenda while English may not be (at least in the finance portfolio).

Notwithstanding the ‘will they, won’t they’ debate about compulsion the abiding mood at the Wellington conference was that the financial services industry, as well as employers and employees, must start grappling with the reality of KiwiSaver.

And one of the points raised by many of the speakers at the Superfunds conference was that KiwiSaver needs a significant level of advice attached to it if the scheme is to achieve its goal of growing the retirement nest egg of middle New Zealand.

Phil O’Reilly, head of lobby group Business New Zealand, told the 70 delegates that “KiwiSaver will be the first major financial decision for many young people? so the government needs to link KiwiSaver with a “turbo-charged financial literacy program?.

“Access to independent advice is important but it is also expensive,? he said. “Free information is essential.?

O’Reilly praised the efforts of the Retirement Commissioner and its sorted website but said more must be done to lift the levels of financial knowledge amongst New Zealanders.

He said employers, as the gatekeepers to KiwiSaver, will end up giving financial advice to employees, leaving themselves open to liability – a potential danger particularly for the 96% of New Zealand companies that employ under 20 people.

“Employers and unions have to be careful about what they say to employees… I hope there will be a commonsense definition of what is information and what is advice,? O’Reilly said.

Carol Beaumont, secretary of the New Zealand Council of Trade Unions (CTU), said the union movement would play an active part in providing KiwiSaver information to employees.

“We will take our [KiwiSaver] role seriously and link it to general financial literacy,? Beaumont said. “You can give a lot of information to employees without it being advice.?
Beaumont said the problem of employer liability for giving KiwiSaver advice to employees has been “overstated?.

Like O’Reilly, Beaumont said much of the KiwiSaver information gap will be filled by the Retirement Commission and its sorted website; a proposition that David Kneebone, head of the Retirement Commission workplace financial education project, confirmed.

Kneebone said the Retirement Commission has already launched some KiwiSaver online tools including a list of five crucial questions employees should answer before committing to the savings scheme.

As well as providing some comparative analysis between paying high-interest debt and contributing to KiwiSaver, the Retirement Commission has also provided guidance to the type of product employees should select, according to their personal circumstances.

This may skirt dangerously close to giving personal financial advice but Kneebone said the Commission will not be advising on individual KiwiSaver products.

However, he said the government-funded agency would soon launch a KiwiSaver phone centre to answer queries about the scheme. More importantly, the sorted website will also include performance and fee data from KiwiSaver products once they are launched.

Given the fact employees will be able to switch between approved KiwiSaver products at any time and the known influence of recent fund performance on retail investor decisions, the effect of such no-advice data would certainly bear close attention.

Employers, unions and the government may all end up pushing the boundaries between information and advice but when it comes to final product choice the onus is clearly being placed upon the employee.

Eventually money will flow from an employee’s paycheck, via the IRD, to a fund manager’s coffers, based on the decisions of New Zealanders, who most observers agree are financially ignorant.

The most likely scenario, of course, is that employees will make no decision and their KiwiSaver deductions will end up in a legislatively conservative default product – a prospect that neither excites the industry nor is likely to boost the long-terms savings of the average New Zealander.
David Boyle, ING senior relationship manager corporate super and managed funds, told the conference the six approved default providers (of which ING is one) will be forced to offer “more or less the same product?.

Boyle said the big competition between fund managers will be to become an employer ‘preferred KiwiSaver provider’. The preferred provider becomes in effect a default KiwiSaver fund for a workplace although employees can still exercise individual choice.

Currently about 20 manufacturers are mooted to be developing KiwiSaver products and potentially employees could have hundreds of funds to select from.

According to Boyle, employees, and employers, should not be burdened with an excess of choice when it comes to KiwiSaver. “One fund is not a solution but 40 is probably too many,? he told the conference. “People like choice until they actually have to make a decision.?
Clearly, KiwiSaver, whether it remains a voluntary scheme or not, will leave a substantial portion of the New Zealand population crying out for financial advice. But the consensus from the Superfunds conference is that no one is crying out to give it to them.

In one of the final conference sessions, however, a presentation from Treasury researcher, Trinh Le, put the so-called New Zealand savings crisis in context with a new report based on a longitudinal study of over 26,000 individuals.

The Treasury study found that 70% of New Zealanders (chiefly the wealthy and those on low incomes) were, in fact, financially prepared for retirement.
“Under our baseline assumptions, about one third of the population have current saving rates below that required for ‘adequacy’,? the report notes. “Further research is underway to identify these groups and to assess the magnitude of the shortfalls, as well as to consider how changes in policy might alter their saving behaviour.?

Reproduced from ASSET Magazine, April 2007. ASSET Magazine is the only magazine for financial advisers in New Zealand.