KiwiSaver

Just 16% of Kiwi employers contribute more than the mandated minimum of 3% to employees’ KiwiSaver, according to National Capital’s KiwiSaver Value for Money report for the June quarter.

This compares to Australia where the employer contribution is guaranteed at 11%.

Meanwhile, on the employee side, the average contribution rate for the 12 months from June 2022 to 2023, was 4.3% according to the report – significantly lower than National Capital’s optimal index of 6.3%.

This doesn't bode well for the retirement prospects of New Zealanders, says the report, leaving most 65-year olds $142,000 short of the lump sum they would need for a normal weekly income in retirement.

The news was slightly more positive for National Capital’s KiwiSaver Allocation Index which measures how KiwiSaver members are invested. This rose three points to 58, representing a potential total gain of $48 billion in earnings, but again is below National Capital’s optimal index of 68.8.

National Capital assesses 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). Top scorers are given an A rating.

Looking at performance, KiwiSaver funds added around $10 billion for the June quarter and gained another 25,000 members. The report data, which is after fees but before tax, shows that no funds had a negative quarter but they did not perform as well as the first three months of this year, with an average return across all funds of 2.71% compared to 4.21%.

However aggressive funds generally held their own, contributing around $438 million, with a steady return of 5.41%, similar to an average of 5.42% in the previous quarter.

In terms of value for fees, while a growing number of providers have been phasing out fixed monthly membership fees, 11 of the 24 KiwiSaver providers researched still continue to do so.

Simplicity maintained its position as the provider with the lowest fees among the growth, balanced, and conservative categories.

The average fees varied greatly across different categories. High Growth had the highest average fees at 1.12%, while Conservative had the lowest at 0.61%.

Some providers (BNZ, Booster, Fisher Funds, KiwiWealth, and Nikko) refer to buy/sell spreads, whereas Milford refers to swing pricing in their product disclosure statement.

The report says, the purpose of buy/sell spreads and swing pricing is to protect the value of existing units held by investors by apportioning the transaction costs associated with buying and selling of units to those investors doing so.

On ethical investing Booster KiwiSaver’s Socially Responsible Moderate fund topped the charts with a score of 9.83, while Booster’s Socially Responsible High Growth fund was second place. Nikko, Juno, Superlife, KiwiWealth and Pathfinder also rated highly by this measure but 37 out of the 110 funds analysed scored below the average ethical investing score of 6.

On process and portfolio the data showed KiwiSaver funds have increased their average net cash holdings from 9.26% to 11.40% funded by a reduction in equity assets, and most had a marginal increase in bond allocation. Most providers maintained their investing style between growth and larger value companies, while a consistent increment of current yield was observed across all portfolios.

Massively missing out

In a break out analysis the report tackles the problem of non-contributing KiwiSaver members missing out on the $521 Government contribution. Research from Massey University has revealed that between July 2021 and June 2022, more than one million members collectively failed to qualify for $423 million in Government payouts because their individual contributions for the year were less than $1042.

Breaking it down 580,000 non-contributing members missed out on a collective $302 million, and 484,000 partial-contributing members missed out on a further $121 million.

Applying National Capital’s optimal allocation of 6.3%, this means these cohorts would potentially miss out on $23.5 billion over their working lifetime.

The report says the Government needs to improve its efforts on educating Kiwis on the importance of making minimum contributions.

National MP Andrew Bayly does not think allowing New Zealanders to split their KiwiSaver savings over multiple providers would be too tricky to administer.

Instead it would provide consumer choice and a source of funding for infrastructure development among other things, he says. The proposed policy would allow KiwiSaver members to divide contributions over a maximum of three schemes.

But providers aren’t convinced and wonder whether such a change would add too much extra administration cost to members and the system as a whole.

Simplicity CEO Sam Stubbs says the devil will be in the details.

“If it lowers fees via competition – great. But if it’s an excuse to increase fees because of complexity, not great. So hard to know at this stage but more choice is desirable.”

Ruper Carlyon, founder and CEO of boutique KiwiSaver provider Koura Wealth says it’s an interesting proposal.

“It would be a good thing for us because people might be more willing to diversify towards smaller players in the market with some of their KiwiSaver. If it builds trust and further develops the product, it’s a step forward.”

But he has reservations around complexity, how it would work and whether it would require a rebuild of systems at the Government end.

“The big difference between New Zealand and international markets is that we have the IRD as the central repository for all things KiwiSaver. And so when you sign up to a new provider, what would you do? Would you say you want your balance transferred,  you don't want your balance transferred or  you want X per cent transferred. Or for first-home withdrawal, where would employee and employer contributions go?”

Kernel Wealth CEO Dean Anderson says one of New Zealand’s strengths is the simplicity of our systems – from a simple tax regime to a simple KiwiSaver structure administered centrally through IRD.

Both Carlyon and Anderson refer to the UK and Australia which are now dealing with the problem of investors having pockets of superannuation scattered across the market place.

“Often balances get forgotten, or aren’t regularly reviewed and you tend to see self-managed results are worse than simply getting the asset mix right and keeping costs low,” says Anderson.

Carlyon says over the past five to 10 years, both countries are going through a massive effort to consolidate pension schemes.

Both question how greater administrative complexity would result in lower fees. The upshot for Anderson is that he is indifferent to the policy, as 95% of the market will see little value and it might even add more confusion. He is skeptical on whether it will foster higher innovation, greater innovation or lower fees.

Likewise Mike Heath, general manager of InvestNow which already allows members to spread their KiwiSaver across a choice of 40 funds from 15 providers.

He says while he applauds National for identifying a long-known issue with the KiwiSaver system, much of the complexity, expense and risk would fall on the IRD. Members of more than one scheme would also lose the benefit of consolidated KiwiSaver reporting where all costs and investment returns can be viewed in context.

“The National Party emphasis on ‘flexibility and choice’ in KiwiSaver is on the money,” he says. “But the proposed policy is more likely to introduce confusion and expense when cost-effective solutions already exist.”

Sophisticated investors

Bayly, who is National’s Commerce and Consumer Affairs spokesperson, doesn't think the policy would require major changes to IRD systems. “What we’re thinking at this stage is that you would go to your employer and say you want to split your contributions and they feed it through to the IRD.

“The idea of the IRD’s new BTP [business transformation programme] is that it has full visibility around everything. They’ve now got the systems to do it. There might be some administration costs, but we don't think it's substantial and we can work through in absolute detail with them.”

He says National would probably put restrictions on the proposal. “We wouldn’t want people with a balance of $15,000 spreading their KiwiSaver unnecessarily. Obviously it’s directed at sophisticated people with larger balances and we’re talking for the next five to 10 years.“

As well as InvestNow, Kiwis can also self-select KiwiSaver funds from Consilium and Craigs Investment Partners. Also, Sharesies announced in May that it will allow members of its forthcoming KiwiSaver scheme to choose between six base funds.

“That’s a market solution to the existing situation,” says Bayly, “and that’s great. But people may want to choose their own options. We are going to do as much as we can to encourage KiwiSaver investors and fund managers to participate in alternative forms of investment such as expansion capital, VC, infrastructure. As balances grow people can make the choice for themselves.

Funding new infrastructure

“If you’ve got several hundred thousand, you might want to target your money in certain areas. You might have a social conscience or want to get into infrastructure.”

Bayly says only a few KiwiSaver providers have built the expertise to do alternative investments.

“Many of the larger ones for instance, like the banks, are basically passive managers. And then you’ve got the likes of say Booster, which extensively invests in wine, Sam Stubbs into housing, and Milford which has built an M&A team. So some of them have taken on the capability to do it.”

He says National wants to get third party providers involved in infrastructure and what better investors than KiwiSaver providers with their long term view.

A general review?

Sharesie’s joint founder and CEO Leighton Roberts says, “Giving more choice and control leads to a greater connection, which is what investors have told us they want, and is reflected in our self-select Kiwisaver scheme to be rolled out  in coming months.

“What National is proposing will benefit some investors, but to drive better outcomes for the significant portion of people who are really concerned about having enough money to retire in comfort, there are other policy changes to consider.

“For a step change, why not do a proper policy review of Kiwisaver that considers access, contributions, tax incentives, and compulsion.”

In a similar vein Anderson says he would rather see an ambitious policy announcement on growing KiwiSaver engagement, enhancing financial literacy in schools and tackling the key issue of raising savings rates overall.

On the topic of a general review Bayly says, KiwiSaver is important to the fabric of New Zealand now, and we need to make it even more successful. “So, I think there'll be other elements we'll look at in time.

“We’ve already made a couple of announcements on KiwiSaver so this shouldn’t be read as the only thing we will do.”

Last month National said it would allow tertiary students to access the scheme to pay for tenancy bonds.

Bayly wouldn’t say whether there will be any more KiwiSaver announcements coming out before the election.

National MP Andrew Bayly does not think allowing New Zealanders to split their KiwiSaver savings over multiple providers would be too tricky to administer.

Instead it would provide consumer choice and provide a source of funding for infrastructure development among other things, he says, of the new policy, which would allow KiwiSaver members to split contributions across up to three schemes.

But providers aren’t convinced and wonder whether such a change would add too much extra administration cost to members and the system as a whole.

Simplicity CEO Sam Stubbs says the devil will be in the details.

“If it lowers fees via competition – great. But if it’s an excuse to increase fees because of complexity, not great. So hard to know at this stage but more choice is desirable.”

Ruper Carlyon, founder and CEO of another boutique KiwiSaver provider Koura Wealth says it’s an interesting proposal.

“It would be a good thing for us because people might be more willing to diversify towards smaller players in the market with some of their KiwiSaver. If it builds trust and further develops the product, it’s a step forward.”

But he has reservations around complexity, how it would work and whether it would require a rebuild of systems at the Government end.

“The big difference between New Zealand and international markets is that we have the IRD as the central repository for all things KiwiSaver. And so when you sign up to a new provider, what would you do? Do you say you want your balance transferred,  you don't want your balance transferred or  you want X per cent transferred. Or for first-home withdrawal where would employee and employer contributions go?”

Kernel Wealth CEO Dean Anderson says one of New Zealand’s strengths is the simplicity of our systems – from a simple tax regime to a simple KiwiSaver structure administered centrally through IRD.

Both Carlyon and Anderson refer to the UK and Australia which are now dealing with the problem of investors having pockets of superannuation scattered across the market place.

“Often balances get forgotten, or aren’t regularly reviewed and you tend to see self-managed results are worse than simply getting the asset mix right and keeping costs low,” says Anderson.

Carlyon says over the past five to 10 years, both countries are going through a massive effort to consolidate pension schemes.

Both question how greater administrative complexity would result in lower fees. The upshot for Anderson is that he is indifferent to the policy, as 95% of the market will see little value and it might even add more confusion. He is skeptical on whether it will foster higher innovation, greater innovation or lower fees.

Likewise Mike Heath, general manager of InvestNow which already allows members to spread their KiwiSaver across a choice of 40 funds from 15 providers.

He says while he applauds National for identifying a long-known issue with the KiwiSaver system, much of the complexity, expense and risk would fall on the IRD. Members of more than one scheme would also lose the benefit of consolidated KiwiSaver reporting where all costs and investment returns can be viewed in context.

“The National Party emphasis on ‘flexibility and choice’ in KiwiSaver is on the money,” he says. “But the proposed policy is more likely to introduce confusion and expense when cost-effective solutions already exist.”

Sophisticated investors

Bayly, who is National’s Commerce and Consumer Affairs spokesperson, doesn't think the policy would require major changes to IRD systems. “What we’re thinking at this stage is that you would go to your employer and say you want to split your contributions and they feed it through to the IRD.

“The idea of the IRD’s new BTP [business transformation programme] is that it has full visibility around everything. They’ve now got the systems to do it. There might be some administration costs, but we don't think it's substantial and we can work through in absolute detail with them.”

He says National would probably put restrictions on the proposal. “We wouldn’t want people with a balance of $15,000 spreading their KiwiSaver unnecessarily. Obviously it’s directed at sophisticated people with larger balances and we’re talking for the next five to 10 years. “

As well as InvestNow, Kiwis can also self-select KiwiSaver funds from Consilium and Craigs Investment Partners, while Sharesies announced in May that it will allow members of its forthcoming KiwiSaver scheme to choose between six base funds.

“That’s a market solution to the existing situation,” says Bayly, “and that’s great. But people may want to choose their own options. We are going to do as much as we can to encourage KiwiSaver investors and fund managers to participate in alternative forms of investment such as expansion capital, VC, infrastructure. As balances grow people can make the choice for themselves.

Funding new infrastructure

“If you’ve got several hundred thousand, you might want to target your money in certain areas. You might have a social conscience or want to get into infrastructure.”

Bayly says only a few KiwiSaver providers have built the expertise to do alternative investments.

“Many of the larger ones for instance, like the banks, are basically passive managers. And then you’ve got the likes of say Booster, which extensively invests in wine, Sam Stubbs into housing, and Milford which has built an M&A team. So some of them have taken on the capability to do it.”

He says National wants to get third party providers involved in infrastructure and what better investors than KiwiSaver providers with their long term view.

A general review?

Sharesie’s joint founder and CEO Leighton Roberts says, “Giving more choice and control leads to a greater connection, which is what investors have told us they want, and is reflected in our self-select Kiwisaver scheme to be rolled out  in coming months.

“What National is proposing will benefit some investors, but to drive better outcomes for the significant portion of people who are really concerned about having enough money to retire in comfort, there are other policy changes to consider.

“For a step change, why not do a proper policy review of Kiwisaver that considers access, contributions, tax incentives, and compulsion.”

In a similar vein Anderson says he would rather see an ambitious policy announcement on growing KiwiSaver engagement, enhancing financial literacy in schools and tackling the key issue of raising savings rates overall.

On the topic of a general review Bayly says, KiwiSaver is so important to the fabric of New Zealand now, and we need to make it even more successful. “So, I think there'll be other elements we'll look at in time.

“We’ve already made a couple of announcements on KiwiSaver so this shouldn’t be read as the only thing we will do.”

Last month National said it would allow tertiary students to access the scheme to pay for tenancy bonds.

Bayly wouldn’t say whether there will be any more KiwiSaver announcements coming out before the election.

The National Party says if it is elected it will allow KiwiSaver members to split their savings amongst multiple providers.

National has proposed allowing KiwiSaver members to split their savings between multiple schemes.

National’s Commerce and Consumer Affairs spokesperson Andrew Bayly says the move will drive innovation, boost competition and putting downward pressure on fees.

“The money in every KiwiSaver account belongs to the person who saved it – but the current rules mean Kiwis have to have all their KiwiSaver savings with just one provider.

“That restriction is limiting investment choices, and potential returns, for savers.

“As the sector grows and matures, some KiwiSaver providers are looking to diversify their investments into different classes of assets – such as start-ups and Build-to-Rent investments. However, under the current settings, savers who want to access these new investments are forced to shift all their savings to that provider – limiting choice and competition.

“KiwiSaver plays an increasingly important role in the New Zealand investment environment, as generations of savers continue to accumulate assets. But restrictions on savers and fund managers are pushing up fees and limiting investment opportunities.

“Increasing flexibility and choice for KiwiSavers to allocate their savings across multiple providers will encourage innovation, and higher potential returns over their lifetime.

“That’s why National will give KiwiSavers the flexibility to split their savings across multiple providers to provide more choice, improve investment options and competition. Improving competition is the best way to put downward pressure on KiwiSaver fees.

National also plans to roll back the Credit Contracts and Consumer Finance Act (CCCFA) and it will repeal the recent Conduct of Financial Institutions Act (CoFI).

It says CCCFA imposes additional burdens on lenders, making credit more expensive and harder to obtain, even for basic services such as overdrafts and mortgages.

[MORE TO COME]