KiwiSaver

Treasury wanted a reallocation of KiwiSaver default members so that each default scheme had a similar number of members, a regulatory impact statement shows.

The Government is working through tappointing KiwiSaver default providers for the next term, which starts next year, through a tender process.

At the moment, there are just under 690,000 people in default funds and almost 400,000 of those have not made an active choice to be there. There are nine providers of default schemes – AMP has the bulk of the market, at 22.38%, followed by ANZ.

The Ministry of Business, Innovation and Employment and Treasury said in the regulatory impact statement that providers of default funds had many benefits – there was a steady stream of customers and they had a reputational benefit.

“Some providers have told us that the reputational benefits of being a default provider alone would incentivise them to tender competitively.”

But they said a potential outcome of the current procurement process was that one or more of the default providers might not be reappointed as a default, and that would create questions as to what should happen to their members who had not made an active choice to be there.

The KiwiSaver Act allows regulations to be made to provide for default members of a scheme to be reallocated and transferred at the expiry of the providers' instrument of appointment.

If members were to remain with the scheme they defaulted into they would lose the protections of the default scheme, such as limits on fees, the paper said. There would also be insufficient incentives for new providers to tender or tender competitively because the rate of new default sign-ups had slowed significantly.

There would also be insufficient incentive for schemes to engage with default, non-active members.

“If they do not face any risk that default members would be transferred away at the end of their appointment they may have reduced incentives to incur the expense of attempting to engage with members.”

Treasury preferred the idea of transferring members from default providers with more members, as well as those not reappointed, to providers with fewer.

But MBIE backed the option proposed by Government of reassigning the non-active members of a provider that was not reappointed. This would reduce the disruption in the market and the risk of people losing trust in the scheme, the paper said.

The paper noted that a large transfer of members could have an effect on the financial markets.

“When a member is transferred their investments are liquidated and the accumulated funds and data are transferred to the new scheme. During this time, the value of the KiwiSaver fund is taken of the market, transferred to the new provider and then reinvested into the market.

“Subsequently, providers with incoming members will be obligated to invest these funds. There is a risk that if these investment all occur at the same tine the increased demand for investment vehicles could serve to drive up market prices.”

That could be mitigated by staggering transfers, the paper said.

 

 

 

 

More people over the pension age are choosing to keep their KiwiSaver funds active, AMP Wealth Management says.

“We’re seeing fewer KiwiSaver clients withdrawing all their funds when they reach retirement age,” chief executive Blair Vernon said.

“In fact, nearly 7% less than this time last year, representing about $4 million in KiwiSaver investments.”

Vernon said low interest rates were one possible reason for the trend, but said KiwiSaver offered more than a better return.

“Another compelling feature of KiwiSaver for members aged 65-plus compared to some other savings products is the ability to withdraw partial amounts from your funds whenever you like, or need, without incurring any penalty. This can be especially important for this demographic as their needs change.”

The Financial Markets Authority’s annual profile of KiwiSaver members showed an 11% increase in members aged in their 70s in the last two years.

A survey by AMP revealed that more than 25% of respondents expected to still need to be working full-time when they reached 65 and more than 40% thought they would be working part-time.

Financial adviser Michael Cave said the current cohort of KiwiSaver members who had recently retired were most likely very pleasantly surprised at having an unexpected nest egg.

“We know that an increasing number of older Kiwis are struggling to save financially and many hadn’t counted on getting to retirement having built up a good level of savings, but KiwiSaver is helping to change that.

“For those aged 65-plus, the fact that their KiwiSaver money is currently working harder for them compared to bank deposits for example, while also allowing greater flexibility, means it makes absolute sense for them to stay in KiwiSaver,” he said.

AMP pays its own staff their employer contributions at a rate of 12% past 65, although it is not a requirement.

New Zealand deserves a level (default) playing field

NZ Funds recently launched a free COVID-19 KiwiSaver hotline supported by independent advisers throughout the country. The phone line is open to clients of any KiwiSaver provider and promises no sales or products, just generic KiwiSaver advice. Since its launch, the phone line has been inundated with calls from anxious investors whose savings are with large state-appointed default managers (whether or not their savings are in default funds). This raises the question: How did New Zealand end up with so many KiwiSaver  members “owned” by so few managers; and is that model consistent with good customer outcomes?

One of the features of KiwiSaver, that helped get it across the line in Parliament, was that it would not be compulsory. The compromise was, and still is, that new employees are invested by default and need to opt out. While a compulsory savings regime – like most of  the Western world has – would have put New Zealand in a better position today, the opt-out scheme was nonetheless a success in that a larger number of people chose to remain invested. 

As New Zealand was decades late in establishing a government-sponsored superannuation savings regime, financial literacy in New Zealand was low. To safeguard millions of first time investors who did not actively select a manager and fund, the state placed their  investments in a default fund. Default funds were required to own at least 80% in cash and bonds, and up to 20% in growth assets, an excellent starting point for first time investors.

The Government selected six managers in 2006 to manage default funds for a period of seven years. These were: ASB, AMP, ING, Mercer, National Mutual (AXA) and Tower. In total, two Australian-owned financial conglomerates, one American, one Dutch and one French. And only one New Zealand-owned company, Tower.

The default providers were selected for their ability to meet a number of criteria including security and organisational credibility, organisational capability, proposed design of their default KiwiSaver scheme, administration capability, fee levels and investment capability.

While admirable, these sentiments and criteria may have missed the mark. ING was sold to ANZ, a transaction which coincided with large losses in its structured credit funds. AXA packed up shop and returned to France, selling its business to AMP NZ (which, following an unreserved apology to the regulator for failures in regulatory disclosure by AMP Australia, may now be for sale itself). Meanwhile, Tower decided funds management was no longer a core business, and sold to Fisher Funds, which in turn was sold to TSB Bank.

Since then, the default providers have been expanded to include two more large Australian-owned banks (BNZ and Westpac) and New Zealand’s own Kiwibank. Funds management is not the primary driver of any of these companies’ bottom line. Grosvenor is the only default provider that is a New Zealand-owned funds management specialist. 

KiwiSaver managers have to meet a high standard of governance (determined by the FMA) to become a Managed Investment Scheme licence holder. Despite this, only six – and now nine – of all 23 licensed KiwiSaver managers are able to be default managers. It is  time that all licensed managers be given the opportunity but not the obligation to be default providers.

The FMA’s purpose is to promote a fair, efficient and transparent market that results in good customer outcomes. State-determined monopolies are rarely associated with good long-term client outcomes. MBIE has sought feedback in preparing for a review of New  Zealand’s default system. If a manager is good enough to be a licensed KiwiSaver manager, then it should be good enough to manage default funds, if it wishes to. This would give other deserving New Zealand-owned managers like: Summer, Simplicity, Generate, Juno, Milford and NZ Funds, the opportunity to do so. It would also help level the KiwiSaver playing field and go a long way toward achieving better customer outcomes.

 

Michael Lang is Chief Executive of NZ Funds and his comments are of a general nature.

Sir Michael Cullen: The man who helped New Zealanders make better financial decisions.

Every now and then someone comes along who, in their lifetime, puts in place changes which touch not only everyone in their generation, but generations to come. Sir Michael Cullen is one such person.

In 1898, the government of Richard Seddon introduced a means-tested “old age pension”. This pension was available for people 65 and over and was worth around one-third of the average wage. This pension, like most of the later changes, was funded out of current
taxation rather than through a separate investment fund. Subsequently, the age of eligibility declined to 60 and the pension as a percentage of the average wage increased.

However, those who were fortunate enough to be employed by a responsible employer – like my father whose employer was the Auckland Hospital Board – could contribute a portion of their salary to a superannuation fund which paid either a lump sum, or an annuity or the rest of their life based on a percentage of their final salary. 

Life in New Zealand was good. But over the course of a generation things were to reverse. Many financial commentators cite the high inflation of the 1970s, the debt taken on to pay for “think big” projects and the decision to remove the tax deduction for private superannuation payments, as the cause of our nation’s reversal in fortune. But it was only the first in a series of extraordinarily poor financial decisions that led to our current predicament. 

Over the course of several decades, successive New Zealand governing parties decided that individuals who were able to directly manage investments in property or the shares of listed or unlisted companies should pay no capital gains tax. Meanwhile those individuals who relied on others to manage their money were forced to pay full corporate tax rates of around 33%, irrespective of which personal tax bracket they were in.

 

 

This contributed to the eighties property and share market booms and subsequent busts, and the gradual decline of the superannuation industry. No one was interested in offering professionally managed retirement funds because of the 33% tax rate. 

Those with property or share management skills got wealthy, while regular savers got penalised. At the same time the age of eligibility for NZ Super rose to 65 and the payment fell to 33% below a “no frills” lifestyle.

In 1992 – a year after Australia introduced compulsory superannuation contributions for all its citizens – New Zealand formed the Todd Taskforce to question whether compulsory retirement savings should also be adopted by New Zealand. Headed by Auckland accountant Jeff Todd, they concluded that a compulsory superannuation option would be “an over-reaction to averting a future fiscal problem”.¹ It is arguably one of the worst financial decisions New Zealand ever made. As a consequence, the average Australian citizen now has around $145,000² in superannuation savings. New Zealand’s average KiwiSaver balance has just hit $19,500.³

In the 2000s, Michael Cullen (now Sir Michael) changed all of this with three farsighted decisions: the portfolio investment entity (PIE) tax regime, which restored equality of capital gains tax between investing individuals and professionally managed portfolios; the creation of the New Zealand Superannuation Fund – now a world class sovereign fund manager; and KiwiSaver through which New Zealanders have already amassed $57 billion.³ Despite poor historical decisions, one person managed to put New Zealanders back on track.

We all have a role to play in continuing to build on Cullen’s legacy by ensuring that New Zealanders continue to make the best possible financial decisions. The upcoming selection of default KiwiSaver managers will be a significant step on the journey toward becoming a more financially prosperous nation. It is sad to hear that Sir Michael Cullen is unwell. Our thoughts go out to him and his family.

Source: FMA 2019 Annual KiwiSaver Report, New Zealand Superannuation Fund 2019 Annual Report.

1. Todd Taskforce 1992. 2. Australian Bureau of Statistics, 2017-2018 balances. 3. FMA 2019 Annual KiwiSaver Report.

Disclaimer: Michael Lang is Chief Executive of NZ Funds and his comments are of a general nature