KiwiSaver

The Retirement Commissioner has made her recommendations for improving KiwiSaver and wants help from members of the financial services industry to get politicians to actually read it.

She also wants the financial advice sector to get some cohesive messaging about products and services for retirement planning.

Speaking on a Harbour Asset Management webinar about the recently released KiwiSaver Opportunities for Improvement Report, retirement commissioner Jane Wrightson asked what the financial services industry could do to build momentum behind calls for KiwiSaver reform.

She called on members of the financial services industry to raise the report with politicians of all stripes.

Wrightson said she would be talking to politicians herself, but governance of KiwiSaver was “not healthy” with three ministers involved, but none having specific responsibility for the retirement scheme. As a result it often fell to the minister of finance and was lost among other priorities.

“So it would be helpful, as I’m trying to tackle three ministers, if the industry can form a composite view on the report.”

She said audience members could also draw the attention of politicians to the report. “Tell them there’s work to be done here, and whether they know about the report.”

Wrightson said the purpose of the report was to provide a data and evidence-based perspective on what changes would make a difference.

The report outlines 15 non-binding recommendations for the government to improve the KiwiSaver including keeping it as an opt-in scheme.

Wrightson said although she has said in the past that compulsory KiwiSaver was a no-brainer,  the latest analysis showed compulsivity wouldn’t improve the scheme in any material way.

Instead the biggest opportunity for change would be to introduce a higher default contribution rate of at least 4% with employers matching, and retaining the 3% contribution rate if the employee can’t manage it.

Other recommendations were: keeping settings that limit membership to one KiwiSaver provider, increasing the government contribution for the self-employed, employer contributions should be required for over 65s and under 18s, remove total remuneration approaches by employers, and extend government contributions to people on paid parental leave to include those who can’t continue their own.

Wrightson said she would like ministers to form a consensus and also wanted cross party talks to get a longer term accord.

“There is a critical need for long-term thinking beyond one election term and electioneering.  KiwiSaver shouldn’t be affected by knee jerk political decisions.

“We’ve got carried away with it as a savings and investment vehicle and haven’t framed it as a retirement fund. We want to see it as a retirement frame and then what else should people do to deal with life shocks.”

Nat strat revamp

The Retirement Commission is also revamping the national strategy for financial capability and wants industry input. In August it will launch new goals for the strategy to support people to grow their money.

Wrightson said that when it came to retirement, the financial advice sector didn’t have a “good collective approach” on what products and services it offered the public. Instead, she said, there was a lot of individual marketing.

“The advice industry still needs to figure out what its collective message is. You’re talking about the value of a service for different types of people. It might not be a campaign but just consistent messaging.”

In an exercise undertaken by the Sorted team, even finding a financial adviser to suit individual needs on the FANZ website was hard work.

KiwiSaver funds under management increased 7.2% for the first quarter of the year (from $107.5 billion to $115.2 billion) to deliver 18.6% over the previous 12 months, but the value of NZ assets fell for the quarter.

The value of KiwiSaver NZ assets decreased 4.17%, from $49.1b at the end of December 2023 to $47.1b at the end of March this year. This compares to overseas assets which rose 25% ($58.3b to $68.1b) over the same period. 

Simplicity’s Sam Stubbs, says the decline in local assets is the impact of equity market performance and currency. The New Zealand dollar weakened and although the local share market was positive, returning 3.1%, whereas the MSCI ACWI returned 14.5% in unhedged NZ dollar terms.

However, zooming out 10 years, the gap between overseas and NZ asset allocation in KiwiSaver investment has been steadily widening.

NZ assets recorded an annual increase of 9.5% ($42.9b to $49.1b) compared to a 16.8% increase for overseas assets ($54.2b to $68.1b).

Compound annual growth rate (CAGR) of KiwiSaver FUM for the past 10 years is 18.4%, but over the same period the CAGR of NZ assets is 16.4% versus 19.9% for international.

In the four years since Covid, international assets have grown 126% versus New Zealand assets at 41%. Meanwhile NZX trading value last year was the lowest in a decade. Year to date, its value traded is down 12% on last year.

Stubbs estimates about 70% of money is going overseas through lack of local investment opportunities and it’s going up every day.

Companies are moving to Australia, local authorities are tapped out on debt and there is a lack of infrastructure and private equity markets. “It’s one of the reasons we’re investing in build-to-rent housing and mortgages, trying to redress that imbalance.”

Kernel managing director Dean Anderson says there’s a structural decline in investment towards New Zealand's capital markets at a time when KiwiSaver continues to grow.

“There’s no lack of capital. There’s billions of dollars of capital that could flow into supporting NZ growth, capital markets and infrastructure but it’s not. It’s simply going overseas at the moment.

“A lot of people point the blame at the exchange on this. We’re not seeing listings or we’re seeing some pretty average listings come to market and delisting of large companies.”

It’s the ecosystem

But, it’s not down to the exchange, rather it’s an ecosystem challenge, says Anderson.

One factor is collective regulatory compliance and the costs associated with listing, one being the requirement for NZX-listed companies over $60 million to do climate related disclosures.

“For relatively small companies and future growth companies, it's another piece of compliance and cost they have to carry and they can all add up. That’s when it starts to become attractive to do a private sale or a trade sale or to raise private funding rather than an exchange listing.”

Anderson is heartened to hear that the NZX is working with Commerce and Consumer Affairs Minister Andrew Bailey on the compounding effect of various different pieces of legislation on market listings.

Brokers looking to bring companies to market also need to work closely with the exchange to make it attractive to list rather than doing a trade sale or selling overseas, he says.

And asset managers need to direct assets here and realise there’s probably some really good value in our local market, he says. “The whole ecosystem needs to work together.”

Anderson says asset managers are conscious of peer risk and will keep close to norms.

“A lot of managers keep an eye on the target allocations of others, including how much is domestic and international, and are conscious of being different from the market. So, if there's just been general growth towards international assets, others may follow because they don't want to take on that peer risk.”

The zone of possibility

Stubbs says the large scale, long term solution is more KiwiSaver money in infrastructure and housing and institutional ownership of housing and infrastructure.

“So that’s where there's an opportunity to soak up a lot of money in a sensible investment but that obviously requires the government or councils to make projects available for funding, and also for KiwiSaver managers to step up and be ready to fund them.

“We haven't had a history of that in New Zealand; we’ve had one-off, bespoke infrastructure projects which have been PPPs [public private partnerships], but there’s this rising pile of KiwiSaver money now where we can start to think about writing cheques which would be big enough to help fund infrastructure projects. We're just getting into the zone of possibility now.”

This wouldn’t need changes to the KiwiSaver Act, rather clear direction from the Financial Markets Authority on the acceptability of illiquid investments.

“What the FMA and the minister need to do is effectively green light, or give formal permission for KiwiSaver managers to have more money in unlisted assets, as long as they're managing liquidity properly.

“There’s been a good deal of uncertainty to date about what an acceptable amount of private asset investment is, and so if the FMA and the minister signal that to the market, then the market will basically respond accordingly and start putting more money in.”

New KiwiSaver analysis for 2023 shows the 25% gap between men and women’s balances did not improve over the year.

The average KiwiSaver balance at Dec 31 2023 was $31,823, an increase of 16.2% ($4,444) from the previous year, shows research by Melville Jessup Weaver (MJW) for Te Ara Ahunga Ora Retirement. The increase reflects the strong recovery the financial markets experienced over 2023.

The average balance for men grew 16.2% (by $5,109) and 16.6% (by $14,147) for women. However, the gap between the average balances of men ($36,605) and women ($29,291) remained at 25% ($7,314).

Te Ara Ahunga Ora policy lead Dr Michelle Reyers says the results are disappointing and highlights the importance of closing gender pay gaps and the impact they have for KiwiSaver balances and retirement. She says it's good to see the gap didn’t widen as it did in 2022 from 20% to 25%. 

Men and women in their 40s and 50s continued to display the widest breach. On average, women in their 40s had approximately 32% ($11,000) less KiwiSaver than men, while women in their 50s had about 36% ($17,000) less.

This likely reflects the combined impact of the gender pay gap, time out of paid work, and the higher percentage of women than men that work part-time, says the report.

Overall less than 10% of KiwiSaver members had balances over $80,000 and there were more males than females in this category across almost all age brackets. Only 17% of women aged 51-65 had more than $80,000 compared to 26% of men.

Many members continued to have low KiwiSaver balances, with 38% having less than $10,000 compared to 41% in 2022.

“We know that the cost-of-living pressures many are facing will be contributing to this. However, lower KiwiSaver balances have a significant impact, particularly on women who need to fund their retirement for longer,” says Reyers.

This latest analysis follows research released by Te Ara Ahunga Ora and Auckland University of Technology in April, which also highlighted how the gender pay gap affected KiwiSaver contributions.

Despite men and women both contributing at the same average rate of 3.7%, the gender pay gap resulted in large differences between the average dollar amounts contributed by both employee and employer.

Reyers says its data collection and analysis is used to shape future policy decisions.  In June, Retirement Commissioner Jane Wrightson will release a paper outlining policy options for the government to explore to improve the scheme.

The MWJ report covers 98% or more than three million KiwiSaver members with funds under management of $104.21 billion as at December 2023.

Women can narrow the $61 billion KiwiSaver retirement gap through playing to their investment strengths, says financial advice firm National Capital.

In its fifth quarterly report on KiwiSaver, National Capital says women, on average earn 25% less salary than men. This, combined with a less growth-oriented investment strategy favoured by women, means the KiwiSaver gender gap at retirement could reach as much as $61b.

While major systemic change is needed to close the wage gap, focusing on investments that aim for higher growth would give women more money at retirement, says the report.

It cites analysis by US fund manager Fidelity, that showed over a 10-year period, women out performed men by 40 basis points. However they also under rated their ability as investors compared to men.

A range of studies in the recent past have shown women achieve better investment results than men. In  2022,  Wells Fargo found that women only take around 82% of the risk men take, yet still earn higher risk-adjusted returns over time.

Women are less prone to jump funds in times of volatility. US insurance and financial services company Nationwide research found that in times of volatility, only 8% of women pulled money from their retirement accounts, compared to 15% of men. Meanwhile a study by the University of California, Berkeley found that women trade less with men trading 45% more often resulting in a 2.65% reduction in returns compared to a 1.72% reduction for women.

These are all strengths that women should use, says Fernandes. “We’re saying women should trust in their ability more.”

National Capital looked at the average female New Zealander within the cohort aged 41-45, with an average 30% salary gap.

This translates to a comparative advantage of approximately $50,000 in KiwiSaver funds for men within the same age bracket at age 65.

This assumes a 33% tax rate, and is a long term expected return for various risk profiles ranging from 2.36% per annum for conservative to 7.10% for very aggressive, 2% inflation, 2% salary growth and 1% KiwiSaver fees.

Analyst Ravi Chandola says, comparing the differential of a 40-year old woman investing in an aggressive versus conservative category fund, she would be better off by $60,000.

On its overall rating of KiwiSaver funds, little has changed since its report for December quarter 2023.

National Capital assesses diversified KiwiSaver funds’ value for money on six criteria each adding up to 100: performance after fees (25 points), value for fees (15 points), fund management capability (20 points), provider stability (10 points), portfolio composition and processes (20 points), and ethical investing (10 points).

On performance, average one year returns to the March 2024 quarter ranged from 7.21% for conservative funds to 19.87% for high growth funds. All funds yielded positive one year returns to the March 2024 quarter. The highest one year performance was Generate’s KiwiSaver focused growth fund at 25.44%, while the lowest was OneAnswer KiwiSaver’s conservative fund, returning 5.88%.

On fees, Simplicity maintained its position of lowest fee provider across growth, balanced and conservative categories. The average fees varied across categories; high growth had the highest average fees of 1.12%, while conservative had the lowest at 0.61%.

While a growing number of providers have been phasing out fixed monthly membership fees, 12 of the 24 providers researched still included membership fees in their product disclosure statements.
On ethical investing Booster KiwiSaver’s Socially Responsible funds scored the highest across high growth, growth and balanced funds. Simplicity’s conservative fund scored the highest in the conservative category with a rating of 8.23 out of 10.

Overall, the managers maintained how they invest ethically with an unchanged average of 6.11 from last quarter. This score indicates having some exclusions, so overall managers seem to be paying attention to ethical investment, the report says. Other high scorers include Fisher Funds TWO, Fisher Funds KiwiSaver plan, Nikko AM, Pathfinder, MAS and Simplicity.

Superlife’s passive funds varied widely on ethical ratings, securing second rank in the balanced category with 8.7 out of 10 but 2.15, 2.44 and 1.97 respectively for the high growth, growth and balanced funds.