Tax breaks needed to boost savings: Milford

One fund manger is calling for tax breaks to boost New Zealand’s savings rate.

Milford Asset Management chief executive Troy Swann said savings was a politically sensitive issue. He said New Zealand’s household savings rate had been negative for the past several years, compared to a rate of 4.6% in Australia.

“As a matter of urgency, New Zealand needs to lift its savings rate. Before he became Finance Minister, Grant Robertson said he wanted to see KiwiSaver minimum contribution rates lifted from 3% to 4.%. The problem here is that many Kiwis are already very stretched financially and cannot afford to contribute more.

“A more effective way to encourage people to save more, Milford considers, would be to incentivise them to do it. For example, allowing people to make tax-deductible contributions, capped at a certain amount each year, to their KiwiSaver account. Whilst still allowing them to contribute over and above the annual cap on a non-tax-deductible basis.

“Currently the median New Zealander is earning about $49,000 p.a. yet anyone earning over $35,000 p.a. has no tax incentive to save more than 3% to their KiwiSaver account. Australia, the US, the UK and Canada all have stronger forms of tax incentives to encourage extra retirement savings – and all these countries have higher savings rates than New Zealand.”

He pointed to Australia’s tax system, where there are higher individual tax rates but the tax on super earnings is only 15%.

He said it was something that should be considered by the tax working group, chaired by Sir Michael Cullen, which is currently receiving submissions from people on the future of New Zealand’s tax system.

“What we’re effectively trying to do is encourage people to defer their current consumption for something that it will take them a long time to realise the benefit of. Tax incentives that tilt the benefit towards savings are something that need to be considered.”

Milford also wanted to see a move towards lifestages-style funds as default options and for a Government-sponsored study to be run of individual savings patterns and retirement requirements.

“Having a conservative fund as the KiwiSaver default fund is akin to giving our community poor investment advice,” Swann said.

“And in this case the poor advice is coming from the Government and it’s costing Kiwis hundreds of thousands of dollars in their retirements. A decade on from the start of KiwiSaver, it seems to have proved too hard for default providers to move their clients into growth funds. Clearly, action is now called for from the Government.

“If we take Australia as our yardstick, their Superannuation money is roughly 65% invested in equities. Which means not only are Australians getting wealthier through higher savings, they are also investing their savings in a much smarter way for maximum retirement gains.”

KiwiSaver fee drop ‘missed the mark’

Small reductions to KiwiSaver fund managers’ fees are nothing to be celebrated, an adviser says.

A review of KiwiSaver default providers’ fees was met with little action from the industry.

Only two of nine providers moved their fee in response – ANZ and Kiwi Wealth. ANZ dropped its fee by just two basis points and Kiwi Wealth by five.

Commerce and Consumer Affairs Minister Kris Faafoi said the review was not primarily aimed at reducing fees, although the changes would mean $1 million in fee savings for members over the rest of the default providers’ terms.

“But I have been very clear that we want to see strong competition between KiwiSaver providers and fees going down. The cumulative effect of fees and returns can make a big difference to how effective the funds are at providing for people’s retirement.”

Adviser Brent Sheather said more action was needed.

“If I was in the favourable position of being a default provider I would be offering to reduce fees further and talking to my competitors off-the-record to see if we all sing from the same songbook…probably illegal under anti-competitive laws but do we think the fact that everyone has similar fees is a coincidence?

“I don’t think there is anything to be celebrated in the small reductions made.”

The Financial Markets Authority updated its KiwiSaver tracker tool for the December quarter. It shows fees as a proportion of returns.

Growth funds were some of the poorer performers in the three months – Booster’s geared growth fund had 15% of its returns taken in fees – a figure that rose to 16.6% of its trans-Tasman share fund’s returns. Fisher Funds Two Equity scheme’s fees were equal to 9.3% of returns and the Lifestages Growth Portfolio fund’s fees were 21.4% of returns.

Sheather said the tool understated fees because it did not include trading costs.

The process for the next appointment of default KiwiSaver providers will start in 2019, and Faafoi said fees would be a significant factor in the tendering and appointment process.

‘Information gap’ harming KiwiSaver outcomes

KiwiSaver investors still lack the knowledge required to make good choices about the investments, ASB’s latest KiwiSaver survey shows.

ASB senior wealth economist Chris Tennent-Brown said the latest KiwiSaver survey, for the February quarter, showed most were still extremely conservative in their investment preferences, which would could harm their long-term outcomes.

“It’s surprising that a high number of investors regard term deposits as the investment likely to provide the greatest return, with many saying they would like to see term deposits available as an investment choice within KiwiSaver.”

The February 2018 quarter ASB KiwiSaver Survey found 17% of respondents had never reviewed their fund choice, and 19% did not even know which fund their investment was in.

“We strongly encourage KiwiSavers to look at their timeframes and goals when choosing their investment fund.  Unless an investor’s timeframe is very short, we expect some exposure to share markets will enhance their long-run returns,” Tennent-Brown said.

“A reasonable exposure to share markets within a KiwiSaver fund is appropriate for investors with a decade or more until retirement.

“In contrast the default conservative funds typically have a low exposure to share markets, and accordingly, are expected to have lower long-run returns.”

The survey found respondents did not understand how KiwiSaver worked, which created uncertainty, especially through periods of volatility.

“February’s volatility has highlighted the challenges for both investors and product providers,” Tennent-Brown said.

He said the wobbles needed to be seen in the context of long-term performance.

“The fluctuations in the NZX are consistent with dips we have seen over the past decade, but it’s important to factor in the large gains over the past year when considering the February declines.  The lack of volatility and the staggering share market gains of more than 20% over 2017 are more unusual than the early February dip.”

He said there was an information gap between providers, investors and markets which affected KiwiSavers’ confidence when it comes to choosing which fund to invest in.

Market wobble highlights value of advice

Share market volatility this week caused little concern for KiwiSaver members – and that could be down to financial advisers doing their job.

Booster chief investment officer David Beattie said his organisation had received just one call after US markets dropped at the beginning of the week.

He said that could be because the Booster model focuses on members receiving personalised financial advice.

In most cases, an adviser would be the investor’s first contact point rather than Booster itself. He Advisers were given information with which they could respond to any worried clients this week, he said. That would give clients more confidence.

Ana-Marie Lockyer, at ANZ, said there had been only a very small increase in calls and switches. “To put that in context, it is double digits out of 700,000 customers.”

“We continue to remind members that volatility is simply part of share markets. At ANZ Investments we remain focused on long term goals rather than short-term ‘noise’. With global economies continuing to perform well, we believe the fundamentals for good share market performance remain in place. We also have good diversification to help manage volatility,” she said.

“Despite current volatility we believe that maintaining good investment disciplines and staying focused on long-term goals is more important than ever.”

She hoped people would seek financial advice if they felt unsure about how to respond.

“We have seen in the past sensible decisions made when advice is sought.  That said we have not seen a lot of our members seek advice this week, and I am not sure we will as members seem to be getting more comfortable with volatility within their KiwiSaver.”

At ASB, general manager of wealth Jonathan Beale said there had been a few calls asking what the market movements meant. “We have put up a  blog and additional comms, which certainly seems to help.”