KiwiSaver

The fees issue is just one of many around how to get the best out of KiwiSaver default funds, according to Savings Working Group member Paul Mersi.

While the current default fund system isn’t up for review until 2014, the Green Party’s election policy of creating a “public option” default fund managed by the Guardians of the New Zealand Superannuation fund has put the issue into the spotlight.

The Savings Working Group, which was set up by the government to look at policy around savings, mooted a similar policy but didn’t make a recommendation either way.

“We had a view that it was worth looking at but we didn’t have the time or resources to fully investigate that,” Mersi said.

“The government’s got this product where there are a lot of people coming in who don’t care who the provider is.  Our perspective was that one fund, five to six times bigger might be able to be of sufficient scale to paddle in bigger pools and deliver low fees.

“The level of fees is only one bit of it – the other bit is to make sure that they have an asset mix that is appropriate to their circumstances.  There needs to be a more structured approach to tailoring people’s assets to people’s age.”

Mersi said it was proving harder than expected to shift people out of default funds and the managers of the funds weren’t finding them as lucrative in that regard as they’d hoped.

He said the default fund issue would need sorting regardless of which party won the election, and it would be particularly important if KiwiSaver became compulsory as many thousands more would end up in default funds.

“If you’re going to be sucking more people into the machine there’s actually an increased responsibility to make sure the machine you’re sucking them into is the best it can be.”

There would be no implicit Government guarantee with a public KiwiSaver fund, the Green Party says.

“Our proposal to offer a public KiwiSaver fund to lower costs and fees does not come with any Government guarantee,” Green Party Co-leader Russel Norman said.

“If any KiwiSaver provider went broke, the Government may have to respond as National did when AMI got into trouble. Our public KiwiSaver fund would have no more implicit guarantee than any other provider.

“What I can guarantee is that by reducing KiwiSaver fees and costs significantly, New Zealander’s nest eggs will grow considerably.”

Australia’s fee-cutting superannuation reforms announced in September will increase savers’ nest eggs by A$150,000 for a 30 year-old worker earning an average full-time wage.

“The Australian Government is enhancing the savings of Australians significantly through economies of scale. Why wouldn’t we do the same for KiwiSavers here?”.

“A public KiwiSaver fund is a better option to help 1.8 million New Zealanders saving for their retirement than selling state assets to the few who can afford to invest in them.”

The Green Party will create a public KiwiSaver fund to lower costs and boost people’s nest egg on retirement. To achieve the necessary economies of scale to achieve this, the fund will be managed by the Guardians of the New Zealand Superannuation Fund – a $16 billion fund. The front-end provider could be Kiwibank or the Inland Revenue Department, as recommended by the Government-appointed Savings Working Group, depending on who can do it most efficiently.

“The best way to ensure KiwiSaver providers don’t get in to a situation where they’re too big to fail is to regulate the industry well,” Norman said.

“Without good prudential oversight and reporting, we could end up with another AMI situation where the Government has little choice but to bail out poorly regulated KiwiSaver providers.

“One of the first tasks of the new Financial Markets Authority (FMA) will be to ensure KiwiSaver providers are reporting their fee and cost structures in a fully consistent and transparent way.

 

“The FMA can also issue clear parameters for performance-based fees, such as ensuring they’re measured on an after-tax after-cost basis, and include clawback provisions to recoup poor performance.”

 

Fears that KiwiSaver could swamp New Zealand’s small stock market are a long way from being realised, according to new research on the sector.

Morningstar’s Sector Wrap, which shows Australian-invested funds didn’t have a great year, also shows that, while it is growing fast, KiwiSaver is far from being big enough to cause pricing distortions on the NZX.

“The KiwiSaver retirement savings scheme is the only area of the New Zealand investments industry consistently attracting net inflows,” the report says.

“Several commentators have suggested that the weight of money flowing into KiwiSaver options could put further pressure on the already constrained New Zealand sharemarket, driving up share valuations.”

In the four years that the KiwiSaver scheme has been in operation, over $1 billion has been allocated to the New Zealand sharemarket, according to the report.

“Over the 18 months to 30 June 2011, the dollar value traded on the NZX was approximately $35.5 billion. KiwiSaver has attracted inflows of $3.67 billion.

“At an average allocation to New Zealand equities of 12.5%, KiwiSaver flows over these 18 months therefore represented less than 1.5% of market volume.

“This suggests that despite there being significant KiwiSaver inflows to allocate, the proportion flowing into the New Zealand sharemarket is reasonable compared to both total market capitalisation and trading volume.”

The report found that over the past two years, the percentage of KiwiSaver assets allocated to New Zealand equities has increased from an average of 10.4% to 12.35%.

From just under $100 million at 30 June 2008, funds allocated to New Zealand equities increased tenfold to over $1 billion by 30 June 2011.

“Although not especially significant in the context of a $50.0 billion market-cap, the effect of the regular KiwiSaver funds flows is relentless.”

During this same period, KiwiSaver funds roughly tripled their allocation to Australian equities from two to six percent, with funds increasing over 25 times from about $20 million at 30 June 2008 to more than $500 million by June 30.

Market bubbles caused by low interest rates could see speculative KiwiSaver schemes set up to lure unwary investors, Tower Investments chief executive Sam Stubbs warns.

At the Tower Investments quarterly media briefing today, Stubbs said governments were engaging in “financial repression” by keeping interest rates artificially low.

While this tactic gave the governments more “headroom” to try and sort out their shaky finances, it punished savers and risked creating high levels of inflation, he said.

Asked by Good Returns whether there was also a risk of creating market bubbles such as the tech bubble and the more recent housing bubble, Stubbs said that was a definite possibility if interest rates were kept too low for too long.

“Artificially low interest rates create distortions in the investment market,” he said.

“I’m worried that a KiwiSaver fund gets set up to take advantage of this – most people think KiwiSaver is a government-guaranteed scheme.”

Stubbs said the Financial Markets Authority would need to be vigilant to ensure KiwiSavers weren’t being taken for a ride by shady operators investing in bubble activities.

“From a New Zealand investment point of view you need to be wary of what your KiwiSaver fund is investing in.”

Stubbs also said the debate over whether to make KiwiSaver compulsory was “almost settled” with polls suggesting most New Zealanders thought compulsion was a good idea: “the big issue is the contribution rates.”

He said contribution rates of 2% or 4% wouldn’t be enough, pointing to Australia where the rate is 9% and will eventually rise to 12%.

However, an increase to that level would need to be phased in over time to allow people to adjust, particularly those on low incomes who would struggle with 9% or 12% of their pay coming out.

“If contribution rates were to increase by 0.5% or 1% every year for 10 years it would give people and employers time to get ready and it would create a very positive environment for New Zealand – we would go from a capital poor to a capital rich country.”

The best superannuation programme in the world was a three-hour flight across the Tasman, he said.

“Australia is a very capital rich country… if you want to raise money you can raise that money domestically.”