Out of the frying pan into the fire?

Over the lifecycle of a KiwiSaver investment switches will be required at key investor milestones but these can be clunky. Michael Lang talks about the alternatives

By now many New Zealanders have successfully navigated their way out of the default scheme they were randomly allocated to, into more growth-orientated schemes. The move has been a good one, with investors accumulating at least an additional $800 million over the past three years, based on NZ Funds’ estimates. But will it be a case of out of the frying pan and into the fire?

Growth-orientated schemes can be a double-edged sword; while their returns are higher than income-orientated schemes over the long-run, they can deliver significant losses over the short term. In some cases shares, the primary driver of growth schemes, can take more than a decade to recover from a slump. And the recovery times assume investors do not panic and switch to cash, and do not make any withdrawals from their scheme until it has fully recovered.

This is bad news for New Zealanders approaching retirement. To get the most out of their scheme, most New Zealanders will need to make at least two KiwiSaver switch decisions in their lifetime, more if they use KiwiSaver for their first home purchase.

The first switch is likely to be out of a default scheme into a growth scheme. This increases the value of their account at retirement. A second switch decision should then be made thirty or forty years later as they approach retirement. This is a switch out of a growth into a more balanced scheme (that is a mix of income and growth assets). This switch helps preserve the capital sum they have accumulated and prepares the assets for the regular withdrawals that will fund their retirement.

 

So far, most KiwiSaver decisions have been DIY. The FMA’s 2015 review of KiwiSaver providers found that only three out of 1000 New Zealanders receive advice when joining KiwiSaver or transferring between schemes. Today, this should be higher given some of the changes the FMA have made, but anecdotally the vast majority of New Zealanders do not receive advice.

Unfortunately, as KiwiSaver balances grow, so do the consequences of making a poor financial decision. And investors need only make one poor investment decision, for example a switch from growth to income in the middle of a share market slump, to ruin a lifetime of investing. This is why target-date or lifecycle funds have taken off in America since the share market collapse in 2009. Since then, the total assets in lifecycle funds have grown from $158 billion to over $1.10 trillion at year-end 2018 according to ICI and Morningstar Inc.

Out of the 30 schemes offered to New Zealanders to meet their retirement objectives, only nine have lifecycle options1. Of these, only one scheme (NZ Funds KiwiSaver Scheme) offers a waterfall asset allocation that ensures clients are rebalanced every twelve months for a lifetime. All other lifecycle schemes in New Zealand use periodic step changes to asset allocation, made popular in the late 1990’s by Donald Luskin and Larry Tint of Wells Fargo Investment Advisors. Overseas, such schemes have waned in popularity due to the fact that significant market movements can leave these clunkier schemes over or underweight an asset class for years at a time. NZ Funds KiwiSaver Scheme’s LifeCycle ‘Waterfall’ glidepath overcomes this obstacle.

Mindful Money wants to boost ethical investment

The founder of a new responsible investment platform wants to get all KiwiSaver members to think about where their money is invested.

Mindful Money, a new charitable social enterprise that wants to help people invest ethically, launched today.

It is a free platform allowing investors to check what is in their KiwiSaver funds and find one that aligns with their values.

Founder Barry Coates said only 1% of KiwiSaver funds had policies to avoid sectors such as gambling, pornography and alcohol.

Only 2% avoided fossil fuels.

“The KiwiSaver scheme has been important to help us all save. Now everyone with a KiwiSaver can also ensure their savings aren’t being used to harm people or destroy our environment.”

When Mindful Money users enter the name of their KiwiSaver fund, they are shown the companies and proportion of their funds that are invested in issues of concern – fossil fuels, weapons, gambling, alcohol, pornography, tobacco, GMOs, palm oil, human rights and animal rights.

Those highlighted concerns are based on a survey done last year by Mindful Money and the Responsible Investment Association.

"The public has a right to know where their hard-earned savings are invested. Two thirds or more of New Zealand investors have said they want to avoid issues of concern like fossil fuels, weapons, human rights violations and animal cruelty. Now they can find out which companies are making profits from their savings," Coates said.

The platform also allows users to find funds that align with their values and to easily switch to a more responsible fund.

There are nine providers and 23 funds that have been verified as meeting the high ethical standards set by Mindful Money. Users on the website can set the criteria they are looking for and find the fund that fits.

“The time has come for a massive shift towards investing responsibly. It is growing rapidly worldwide. Now New Zealanders can feel good about their investments, do good for people and the planet and earn good returns.

"The relevant question isn't why invest ethically, it's why not?”

The following providers are featured on Mindful Money’s platform:
•       Amanah KiwiSaver Plan
•       AMP KiwiSaver Scheme
•       Booster KiwiSaver Scheme
•       Christian KiwiSaver Scheme
•       Kiwi Wealth KiwiSaver Scheme
•       Mercer KiwiSaver Scheme
•       QuayStreet KiwiSaver Scheme
•       Simplicity KiwiSaver Scheme
•       SuperLife KiwiSaver Scheme

Fidelity life continues nib support

Fidelity Life and nib have confirmed joint quoting and application capabilities will continue from July 1.

Nib products will continue to be supported in Fidelity Life’s Apollo and eApp services, while the Fidelity Life-nib paper multi-app will also be maintained. In addition, nib forms and collateral will still be available from Fidelity Life’s Adviser Centre.

Fidelity Life chief distribution officer Adrian Riminton said: “We know advisers value a combined risk and health offer, and we want to keep making it easy for advisers to do business with us. So we’re pleased to offer advisers service continuity during a time of significant change in our industry – ultimately helping them to deliver good customer outcomes.”

Nib New Zealand chief executive Rob Hennin said: “We remain committed to working with advisers both directly and through our joint services with Fidelity Life to help ensure their clients have health cover that protects them and their families.”

Advisers with questions about nib products, and health insurance in general, should contact their nib adviser partner manager.

Inland Revenue to act on PIRs

Inland Revenue is moving to help make sure investors, including KiwiSavers, get on the correct prescribed investor tax rate (PIR).

Updated estimates show around 550,000 people have underpaid tax on their investments (including KiwiSaver) with an average of $80 to $90 owing per person for the 2019 tax year, says Inland Revenue deputy commissioner, Sharon Thompson.

“This suggests to us that people need support to make sure they choose the right PIR,” she said. “With our new system in place, we’re working on a range of initiatives to help them.

“From mid-July 2019, we’ll begin proactively contacting customers who are on an incorrect PIR to let them know they need to change it to avoid paying too little or too much tax in the future. They can then contact their investment provider to change their rate.

“And in the future, we’ll contact customers during the year if we identify they are using an incorrect PIR. This will be an on-going process to ensure that customers can get things right from the start.

“Because our new system groups together all the income people have, including wage and salary and investments, we can now see if people are on the right investment tax rate relative to their income level.

“In the past our old system did not do this automatically and we relied on people and their investment providers to make sure they were on the right rate.”

Thompson said IR estimated there were another 950,000 people on a PIR that was too high and had overpaid by an average of $44. Current legislation does not allow for refund of overpayment.

She reiterated Inland Revenue’s decision not to go back over previous years to reassess and recover investment tax that may have been under or over paid.

Thompson said trying to go back over past years and determine incorrect payments based on wrong PIRs would have required significant work not just for Inland Revenue but for individual taxpayers and financial institutions.

“So we made a business decision to look forward and not go back. We’ll be working on how we help people to get their PIR right for the future rather than trying to identify errors people may have made in previous years.

“For the 2019 tax year, an estimated $42 million was overpaid. Current estimates show between $45 and $50 million of investment tax was underpaid, and that will be recovered,” she said.

“But these figures are changing as IR’s new system continues to receive information.”