Don’t Dismantle KiwiSaver To Pay For Tax Cuts For High Income Earners

“KiwiSaver is good news for many workers, and the government and employer
contributions shouldn’t be scrapped to help National pay for tax cuts that
deliver the biggest benefits to those on high incomes,” CTU secretary Carol
Beaumont said yesterday.

“The main income issue for low and middle income workers is the need for
better wages, and strengthening collective bargaining so that low wages can be
addressed at an industry level by workers and employers. CTU unions are
actively working on that while the National Party is significantly silent.”

“There is strong interest in KiwiSaver from workers, and unions are working
hard to make sure their members know about their entitlements and get the best
opportunities to benefit from Kiwisaver.”

“Yes there are problems for those on low wages, and the CTU has consistently
argued for easier access for low-income workers into KiwiSaver, and will still
argue for a 2% minimum contribution option.”

“The introduction of a 4% employer contribution to workplace savings phased
in over the next 4 years means New Zealand workers can start to catch up with
their Australian colleagues where a 9% employer contribution is required.
This is excellent news for many workers, and we hope it stays.”

Keep KiwiSaver transparent and treat it with respect

Press Release – Marc Lieberman, Chief Executive Officer,
ING (NZ) Limited

Much has been written and said about KiwiSaver since it was first tabled back in Budget 2005 – part of a package of initiatives designed to increase the level of saving by New Zealand households and to support New Zealanders in retirement.

And after this year’s Budget, with the introduction of tax incentives to increase the scheme’s appeal, KiwiSaver has virtually taken on a life of its own.

It has also produced a plethora of ‘newbie’ KiwiSaver providers, some of whom have mischievously taken to painting the six government-appointed ‘default providers’ as the villain.

As one of the appointed six, ING New Zealand takes issue with this assault.

For the record, ING is one of New Zealand’s leading fund managers, managing close to NZ$9.5 billion of client funds. As a member of ING Group, we are also one of the world’s largest wealth managers, with a history dating back more than 150 years.

In New Zealand, ING has an enviable record of investment performance, being named Morningstar Fund Manager of the Year in 12 out of the last 15 years. And, as the investment manager of New Zealand’s largest and longest-standing retail superannuation schemes, we are proud of our extensive experience and reputation.

Following the introduction of the ‘sweeteners’ in Budget 2007, it is now estimated up to 50% of the eligible workforce is likely to join KiwiSaver. Little wonder in the last few months it has spawned a huge growth industry, with new scheme providers and others clamouring to attract attention.

Cheerleader of the latter is Dr Gareth Morgan, who has garnered a reputation as the bκte noir of fund managers. As far back as 2004, he was assailing the industry for its alleged “conflicts of interest and misrepresentation”.

We acknowledge Dr Morgan’s widespread economic credentials, his engaging personality and ability to communicate in a coherent manner, and we respect him for this. Having developed a role as a ‘media magnet’ on finance matters, he plays a vital role in educating the wider public.

However, Dr Morgan has recently been galvanising public and media interest in the so-called
“naughty behaviour” of the government-appointed KiwiSaver default providers and in particular “their hidden fees and error-ridden unit pricing practices”. At the same time, he has been taking the opportunity to champion his own Gareth Morgan KiwiSaver Scheme.

I have some news for New Zealand consumers and Dr Morgan.

The KiwiSaver schemes offered by the default providers have been independently appraised by a number of industry specialists, investment leaders and media. Notwithstanding this scrutiny, the ING scheme, for one, has received no criticism. Indeed, both Consumer Magazine and the Sunday Star- Times found the ING monthly fees among the lowest of any provider. The Government Actuary has also reviewed and approved our scheme – in particular, the level and transparency of our fees.

Show us the naughty behaviour
Assertions that the default providers indulge in “naughty behaviour” in order to line their pockets at the expense of investors are simply not true. These claims are based on half-truths and outdated practices; not on today’s reality.

The managed funds industry is no different from most others, in that the majority of our processes have evolved as the industry has matured. Coupled with regulation, this means that what may have been considered acceptable ten to twenty years ago is now unacceptable and certainly no longer industry ‘best practice’.

Consumers can rest assured the default KiwiSaver providers and their schemes are subject to both strict regulation and Government Actuary approvals. There are no hidden fees or any of the other claims Dr Morgan has alleged.

In fact, I challenge him to back up his claims with evidence that any such behaviour exists in any of the KiwiSaver products launched by the default providers.

Unit pricing
Dr Morgan does not unit price his own funds as he claims the practice of unit pricing is full of errors, which penalises investors. This is completely erroneous as the following points illustrate:

  • Unit pricing is the globally accepted best practice for managed funds.
  • A unit pricing mechanism enables investors’ money to be pooled to achieve greater efficiencies.
  • Unit pricing allows the constantly changing interests of individual investors in an investment
    pool to be identified and valued regularly.
  • The unit price is published regularly allowing investors to calculate their investment balances.
  • As the accounts of managed funds are subject to independent audit, any errors not already
    identified will be found and corrected.
  • ING New Zealand has never been required by an external party to retrospectively fix any unit pricing errors. We are not aware of any of our major competitors being required to do this either.

We understand the Gareth Morgan KiwiSaver Scheme will have alternative mechanisms in place to value individual interests in an investment pool. However, given the strident criticism levelled by Dr Morgan on the lack of transparency from others in the industry, we find it somewhat concerning he does not disclose how this will be established.

The interest of investors
While Dr Morgan would have us believe he’s concerned for all investors, he actually appears to be very selective in the area of KiwiSaver.

For KiwiSaver default providers, there is no discrimination. If an employee does not choose a
provider themselves, they are randomly allocated to one of the default providers by Inland Revenue.

However, a closer inspection of the Gareth Morgan KiwiSaver Scheme reveals it was established, and I quote, “to service serious long-term savers and to ensure they get value for money. We realise that there will be people that join KiwiSaver solely to obtain the government’s $1,000 kick-start, or the first-home subsidy; or who start with good intentions but turn out to be part-time savers on contributions holidays more often than not. These folk don’t interest us.” In other words, young first-time employees on a low wage need not apply.

The website goes on to make it very clear the low-incomed are not his target: “We want to attract people that are willing to take KiwiSaver seriously. Our fees have been structured in the way set out below because we are not prepared to have individual members with persistently low balances being unduly subsidised by other members or ourselves”.

Just to make sure, the minimum fee charged by the Gareth Morgan KiwiSaver Scheme is $200 – although this is reduced to $50 until July 2009. In order not to be impacted by this increase, clients will need to have an investment balance of $20,000 by 1 July 2009.

To reach a balance of $20,000 in two years, investors need to contribute 4% of an annual salary in the region of $180,000. How realistic is that for most of the people KiwiSaver is designed to assist?

The reality is that, where KiwiSaver is concerned, Dr Morgan is interested in less than 5% of the working population of New Zealand.

Fees – a comparison designed to deceive
Dr Morgan has published a fee comparison calculator on his website based on a series of
assumptions. Not surprisingly, the assumptions used result in his own scheme being cheaper than any other. In addition, for the record, the ING fees shown are incorrect.

Because KiwiSaver is a long-term initiative, fees should reflect what an investor will pay over the life of the scheme. On closer inspection, changing Dr Morgan’s fee to the true annual minimum of $200 (rather than the $50 he uses) suddenly makes his scheme far from the cheapest.

Picking a KiwiSaver provider
ING is a firm believer in the value of good advice. We don’t subscribe to ‘flogging’ product. Ou rmanaged funds, including KiwiSaver, are sold through selected financial advisers who are experienced, qualified and, above all, independent.

These advisers have more freedom to recommend the most appropriate products – from a number of providers – that best meet their client’s needs. Until recently, we counted Dr Morgan as an independent financial adviser. However, these days, as the lead sales person for the Gareth Morgan KiwiSaver Scheme, any investment advice he gives to clients on KiwiSaver should be considered in this light.

We maintain the public needs to look at the following criteria when choosing a KiwiSaver provider:

  • Size, strength and security
  • Independent ratings
  • Experience in superannuation and managed funds
  • Stable team
  • Performance/track record
  • Client base
  • Access to resources.

In Dr Morgan’s case, we have yet to be convinced.
There is no doubt Dr Morgan has been clever with his marketing strategy by trying to create doubt about the other providers; clever, but lacking transparency.

We encourage those looking for a KiwiSaver provider to make their choice based on the facts, not the rhetoric.

KiwiSaver safe for investors

For many New Zealanders KiwiSaver will be the first, low cost, easily accessible, work based savings opportunity that they have experienced, says Vance Arkinstall of ISI.
Press Release

As a result the security of KiwiSaver investment, efficiency of management and performance, must be paramount. KiwiSaver has been designed to provide maximum investor safety.

It is unfortunate that some media comment led by Gareth Morgan has galvanised public and media interest in so called “naughty behaviour” and “hidden fees” of approved KiwiSaver providers.

Claims that KiwiSaver schemes might engage in naughty behaviour are simply not true and require a response. Morgan’s comments cannot be trivialised but they do need to be considered in the context that he is a salesman for the Gareth Morgan KiwiSaver Fund which competes with all other approved providers. His independence is compromised as a result.

Consumers can take comfort that KiwiSaver schemes will be subject to strict regulation, a formal approval process, effective Securities law and rigorous monitoring.”

All KiwiSaver schemes are reviewed by the Government Actuary before approval and registration, particularly to ensure all fees and charges are both fully disclosed and are not unreasonable. It is only following this review that KiwiSaver schemes can be offered to the public.

The six default providers (AMP, AXA, ASB, ING, Mercers and TOWER) were reviewed by an independent Government-approved panel, each provider was carefully selected prior to appointment as a default provider.

All KiwiSaver schemes will be managed in accordance with a Trust Deed. Each scheme must have a “Professional Independent Trustee” who will ensure the scheme is being operated in accordance with the Trust Deed and the law (including the KiwiSaver Act, Securities Act and Securities Regulations Act and others).

As an example, the Securities Act requires full disclosure of all fees and charges and that all information supplied must not be misleading.

All KiwiSaver schemes will be required to report regularly to investors, the Government Actuary and Inland Revenue Department, so performance, management and compliance will be able to be regularly assessed by investors and Officials.

These are stringent requirements which rightly provide serious protection for investors. Within these requirements investors can be confident hidden fees and charges simply cannot occur.

Dr Morgan incorrectly claims that fund managers will be able to channel KiwiSaver funds into “Reserve Accounts”. With KiwiSaver, protection for investors extends to the requirement that all compulsory employer contributions must vest in the member immediately – they simply cannot be credited to a reserve fund.

However, reserves can arise in very specific circumstances involving unvested employer contributions in schemes where employees and employers contribute, and then only in accordance with the Trust Deed under the control of the scheme “Trustees” – Fund Managers are not able to influence or control as has been mischievously alleged.

Criticism has been directed at ‘unit pricing and pooling of funds’, possibly reflecting a lack of understanding of what is globally recognised as best practice.

Both unit pricing and pooling are accepted worldwide practices. Pooling allows cost efficiencies (ie each transaction costs less) together with asset/security diversification, which greatly benefit investors.

The accounts of managed funds will be subject to independent audit and Professional Independent Trustee review/monitoring, so errors (if they do occur) will be found and corrected.

KiwiSaver investors can be confident that their KiwiSaver scheme will operate under the most stringent regulation and approval process and with the protection of independent professional trustees.

KiwiSaver funds will be managed by an industry that has achieved an outstanding record of compliance, global best practice, transparency in all dealings and performance in the interests of investors. In short, KiwiSaver will be very safe for investors.

KiwiSaver is flexible and allows investors to switch providers if they choose.

The launch of KiwiSaver from 1 July has created huge public interest, particularly following the Budget announcement of up to $20 per week taxation credits and phased in compulsory employer contributions from 1 April 2008.

It is certain that KiwiSaver will as a result of these initiatives be a great success. Evidence can be seen in the recent surge of enquiries from individuals and employers and the amount of media comment.

Vance Arkinstall, Chief Executive
Investment Savings and Insurance Association

Absolute return funds will have a place in KiwiSaver portfolios.

As the KiwiSaver infrastructure matures the range of offerings available to KiwiSaver investors will grow, and will eventually include absolute return and alternative investment products such as hedge funds.
Press Release

“A 2004 report presented to the New Zealand Superannuation Fund by Eriksen and Associates recommended an increase in the benchmark weighting to alternative assets,” said The New Zealand Absolute Return Association Inc Chairman Anthony Limbrick.

“Since then the fund has diversified into alternative investments including an allocation to hedge fund products.”

The association believes that as the KiwiSaver investor becomes more sophisticated, as has happened with Australian investors under their compulsory superannuation framework, KiwiSaver portfolios will come to resemble scaled-down versions of the New Zealand Superannuation Fund.

“It is a misconception, especially with regards to the hedge fund industry, that absolute return offerings are leveraged, and therefore highly volatile,” continued Limbrick.

Some specific products are designed to give high returns with accompanying high volatility. However, the absolute return industry is highly diverse with a wide range of return and leverage profiles to choose from.

“An allocation to absolute return products has the potential to both reduce portfolio volatility and enhance returns and we believe local investors will come to understand that premise.” says Limbrick.

He says as the absolute return industry has evolved and become accepted by institutional investors, it has become more “institutionalized”, and with that comes the expectation of higher standards with regards to risk management and regulatory compliance.

NZARA sees its role as encouraging industry “best practice” as well as educating New Zealand investors as to the benefits, and risks, of investing in absolute return investment products.

In addition the association is working to improve the regulatory environment for absolute return investment managers and promotes the New Zealand industry offshore.

NZARA is the organization representing the absolute return investment and hedge fund industry in New Zealand and has been in existence since July 2005.