KiwiSaver

Morningstar says there’s no clear differentiating factor that makes high-performing KiwiSaver funds stand out.

Its latest KiwiSaver survey, to June 30, showed returns bounced back after a tough start to the year.

“Australian and New Zealand equities led the way, while the falling New Zealand dollar helped ensure solid global equity returns. As a result, those KiwiSaver investors in the Balanced and Growth-orientated schemes had the strongest returns,” Morningstar director of manager research ratings Asia-Pacific Chris Douglas said.

Top performers over the quarter against their peer group include ANZ Default KiwiSaver Scheme Conservative (Default) 1.85% (Multisector Conservative),Generate KiwiSaver Conservative Fund 3.51% (Multisector Moderate), Summer Investment Selection 5.50% (Multisector Balanced), Generate KiwiSaver Growth Fund 5.85% (Multisector Growth), and Booster KiwiSaver Geared Growth 7.04% (Multisector Aggressive).

Evaluating the performance of a KiwiSaver scheme during longer periods provides a more meaningful assessment.

During the 10 years to June 30, Milford Active Growth, Milford KiwiSaver Balanced, Fisher Funds KiwiSaver Growth and Aon Russell Lifepoints, and ANZ KiwiSaver were the top-performing options in their respective categories.

Douglas said there was no clear factor that made those successful.

“Managers like Milford are very active and started out with a very large New Zealand book and have done well out of the New Zealand market and then become more diversified as they’ve grown larger.”

Fisher Funds had been similar, using small-cap investments to leverage growth. Aon Russell had large biases to global fixed interest and equities, which had been a sweet spot over the past few years, Douglas said.

ANZ was consistent with a consistent framework and some tactical asset allocation. “In some ways ANZ shows the most resilience of all of them. They’re all very different with different biases in their with the potential to general returns from different parts of the portfolio. That’s what makes KiwiSaver interesting.”

KiwiSaver assets on the Morningstar database grew to $48.8 billion at June 30, from $35.7 billion at the end of 2016. ANZ is the largest KiwiSaver provider with a market share of 25.2%.

Pie Funds is to launch a KiwiSaver scheme in just over a week.

The scheme, called Juno, will go live on August 1.

Documents have been lodged on the Disclose register, showing it will offer a conservative, balanced and growth fund.

The balanced fund had an investment objective of returns of 5% to 10% per year over a five-to-10-year period. The growth fund aims at 10% or more.

Directors of the scheme are Mike Taylor, founder of Pie Funds, Steven Nichols, Roy Knill, Roger Kerr, and Noah Hickey.

Juno magazine founder Jacqueline Taylor is an adviser to the board and Paul Gregory, formerly of the Financial Markets Authority, is head of investments.

Monthly charges are applied to the fund on a tiered basis, ranging from free for those with less than $5000 or who are aged under 18, through to $50 a month for investments between $100,000 and $1 million.

There is then an ongoing fee of 0.42% per year for all funds.

Pie Funds says responsible investment is taken into account in the investment policies and procedures of the scheme.

A group of financial advisers says big banks are using KiwiSaver to line their pockets.

The group wants changes to the way default KiwiSaver schemes operate.

The group is made up of John Cliffe, Phil Ison, Alistair Bean, Rachelle Bland,  Michael Lay, John McLean, John Milner, Tony Walker and John Wood.

The group wants all default funds to be balanced options, to ensure IRD gives default managers the correct tax rates for members, to remove all members in a default fund after 12 months by switching them out, and to introduce a white-labelled government balanced fund for those members.

New default member flows should be stopped to any default provider that did not meet specific engagement and switch-out rates for members and the white-labelled fund should be told to minimise investments in Australian-owned bank securities, the group said.

Fund managers with conflicts of interest in security selection should be investigated and management fees should be refunded when they were charged for placing and keeping investments in their own issued securities.

The group also wants explicit identification and disclosure of conflicts to members.

It estimates  $1.5 billion of KiwiSaver funds are invested in securities issued by Australian-owned banks and insurance companies.

“The problems with default KiwiSaver funds are systemic and long-standing,” Cliffe said, speaking on behalf of the group.

“They are well-understood, yet little of real substance has been done to resolve them by those involved, including the banks and insurance companies, the Financial Markets Authority, the Reserve Bank of New Zealand or successive governments.” 

He said the government’s decisions to keep default funds conservative rather than balanced has resulted in default members missing out on approximately $830 million over the six years ended March 31, roughly $2.7 million every week.

Many of the lowest-income earning KiwiSaver members are paying tax at the highest possible rate of 28%, when they should have been taxed at 10.5% or 17.5%.

The IRD supplies default KiwiSaver funds with default member account details but not the member’s tax rate, so unless a fund successfully contacts members and gets their tax rate, it is required to deduct tax at 28%, the maximum rate. This problem is likely to have affected the majority of those who have been enrolled in a default KiwiSaver fund.

The group said the real winners in the scheme were Australian-owned banks, which had been able to invest the default funds in their own and each other’s securities.

As at March 2018 this amounted to 31% of the ASB’s default fund, 30% of ANZ, 31% of BNZ, 27% of Westpac and 34% of AMP. If a balanced fund option for default funds was implemented, the exposure to Australian-owned bank securities would decrease by approximately $1 billion. The banks charge KiwiSaver members management fees for investing their funds in this way. 

“The FMA, Government Ministers and others responsible for overseeing KiwiSaver have frequently asserted that better financial literacy education of default investors is required along with better fund manager performance in switching out default members to solve the problem,” Cliffe said. “After a decade of failure with this approach it is time to take action.”

Why have so few employers chosen a preferred provider scheme?

The March 2017 FMA KiwiSaver Annual Report showed that 20,004 employers have a preferred KiwiSaver scheme. As IRD records show that over 200,000 companies deduct PAYE, this suggests less than 10% of all employers have a preferred scheme.

This is lower than was originally intended when KiwiSaver was first introduced. But is it leaving New Zealanders worse off or does it not matter?

In the United States, United Kingdom and Australia, employers are required to select a licensed manager at the outset. In New Zealand it was contemplated that after an introductory period which was designed to build confidence in KiwiSaver, both employers and employees would transition from the default regime to selecting a scheme that best aligned with their objectives.

Ten years on, this is exactly what has transpired, with employees at least. Of the 2.8 million (1) New Zealanders who have been enrolled in KiwiSaver (1), only 16.4% (1) are currently in a default fund.

Despite a general agreement that these funds are not appropriate as a long-term savings option, new members are still directed to these funds.

Under the existing rules, if an employee does not select a scheme and their employer does not have a preferred provider, new employees are randomly allocated across the nine different default schemes.

These different default schemes are mandated to have a high allocation to income.

This process is far from ideal from the employee’s perspective. In many cases they receive little or no guidance, they may end up in an inappropriate fund, and there is the high inconvenience of switching. 

From the employer’s perspective, no employer wishes to be seen endorsing one manager over another in case that manager does a poor job.

Anticipating this, the KiwiSaver Act 2006, Financial Advisers Act 2008, and Inland Revenue’s website, state where an employer chooses a scheme they will not be held responsible if the scheme fails. In addition, all schemes are subject to the same regulatory oversight and no scheme is guaranteed by the government, regardless of whether they are a default scheme or not. 

Nevertheless, whether an employer is legally on the hook or not, employees may still hold their employer morally accountable for selecting one scheme over another, and therein lies the rub.

Interestingly, many employers have chosen a “preferred” healthcare provider; “preferred” insurance provider or “preferred” banking relationship.

In most cases they have done so because by aligning with a single provider their employees receive additional value in the form of a discounted price or a higher level of service.

In KiwiSaver, employers may be forgoing the opportunity to offer their employees complementary personalised financial advice, financial planning software, regular financial guidance seminars, dedicated call centres and management reporting which can answer questions such as: “What percentage of your employees feel confident about their retirement preparation?”.

Over time, the issue may well end up being resolved by employees themselves.

For employers, attracting and retaining high quality motivated people is difficult.

Some employers will take full advantage of every comparative advantage they can get, from gym memberships to health and life insurance, banking services and ultimately the additional services and products KiwiSaver providers are willing to offer in order to win “preferred provider” status.

As KiwiSaver balances grow, so too will the perceived value of complementary personalised financial advice.

Access to an Authorised Financial Adviser may seem inconsequential to an employee when their KiwiSaver balance is in the thousands, but as balances climb into the hundreds of thousands and in some cases millions, so too will the value they place on advice.

We can therefore expect the more competitive and entrepreneurial organisations to be the first movers in the preferred provider space.

Interestingly, there do not appear to be enough qualified financial advisers (or schemes for that matter) to provide a full service offering to all of the 180,000 firms yet to align themselves with a preferred provider.

It is therefore not inconceivable that, over time, employers find the best schemes are “closed” to new preferred provider relationships. Like in most aspects of business, there will be risks in moving early, but there should also be rewards.

1. http://www.kiwisaver.govt.nz/statistics/annual/ April 2018.