KiwiSaver

KiwiSaver members shrugged off the only real downturn they have experienced because government incentives covered up its impact – but next time will not be so easy, new analysis suggests.

The superannuation savings scheme has attracted many more members than was anticipated when it launched – it now has more than 2.7 million members and $40 billion under management.

But Ben Trollip, an actuary at MJW, said the government had been lucky with its timing. The markets had been on KiwiSaver’s side through almost all of its existence.

The scheme was launched ten years ago, just before the global financial crisis hit.

But once markets recovered, they entered a bull run that has lasted ever since.

Trollip said the impact of the GFC on KiwiSaver members had been limited because it happened at a time when balances were low, and returns were being boosted by government incentives such as tax credits and the $1000 kickstart.

“You wouldn’t want a bad period of returns at any time. But if you have to have one GFC and then a fantastic bull market, in a situation where your balance is increasing over time you’d prefer the order is bust then boom as opposed to the opposite.”

MJW’s research showed that at the lowest point, New Zealand and global shares lost about 50% of their value.

But members were largely unaffected because balances were so low.

The next crisis, even if it is not quite as big as the GFC, could have a larger impact in dollar terms because they now have more funds at risk.

Trollip said he was worried that members might not know what to do. The government incentives are no longer such as significant part of members’ balances, so the impact will be more noticeable.

“Certainly at some point there will be another crisis. When that occurs, people need to take the emotion out of the decision. It’s easy to make the decisions that feel good. Often the best long-term decision is to do something that feels the exact opposite.”

Trollip said there was a risk that people had been taking more risk than they should because markets had been so strong. “At the moment the markets have been going so well and everyone is so happy to take plenty of risk and they feel they’ve been very smart to do so. But there’s good reason not to over-extend. Don’t be tempted to increase risk to take high returns because of recent results.”

He said MJW’s latest update showed a wider range of returns from managers in NZ shares than would normally be the case. Trollip said that was due to the big rise in value of A2 milk. Those that had been underweight to the stock looked to have performed more poorly.

There will be growing demand for retirement income products as KiwiSaver matures, the author of a new report on pension policy says.

Mercer has this year expanded its Melbourne Mercer Global Pension Index to include New Zealand.

The index reviews global pension systems and assesses the benefits they provide, their sustainability in the context of ageing populations and the level of trust and transparency within their operations. It also recommends actions for improvement in each country.

The report gave New Zealand an overall score of 67.4, or B.

It said the overall index value could be increased by boosting the level of KiwiSaver contributions, raising the level of household savings, increasing the focus on income streams in place of lump sums and continuing to expand coverage of KiwiSaver.

Author David Knox said the first step was to change the way the country’s financial services sector talked about saving for retirement. 

“Part of it is trying to change the language framework of the whole system,” he said.

Providers should talk about saving to replace income, he said, because that was savers’ key goal – not amassing a lump sum.

Knox said he did not support the prospect of compulsory annuities, as in some European countries. “People have very different circumstances in retirement. Some are in poor health, some are in good health.”

But he said the development of income products needed to be encouraged, which could be done through tax incentives.

Many people were self-insuring, he said. “They’re thinking ‘I might live to be 100, I won’t spend all my money. The catch is that then there is money left on the table for the kids. Pension systems are not designed to deliver money to the next generation.”

Traditional annuity products were not attractive in a low-interest environment, he said, but there should be product innovation that allowed flexibility alongside longevity pooling.

Demand was growing in Australia, where compulsory superannuation saving had been around 25 years, he said. When New Zealanders’ KiwiSaver balances got bigger, there could be more of a consumer push for such products here, too.

Knox said there would need to be more education so consumers understood the demographic changes that would make it harder for governments of the future to provide the same levels of support.

Mercer’s New Zealand chief executive said KiwiSaver and NZ Super played a significant part in helping New Zealanders reach their desired retirement income.

“KiwiSaver features, such as contribution rates and compulsion, if amended could further improve New Zealand’s ranking and most importantly the well-being of Kiwis when retiring. Changes can be made to encourage the disengaged, those on lower incomes and the young.”

 

 

 

 

KiwiSaver providers have been told they must do better, as the amount they earn in fees soars.

Financial Markets Authority chief executive Rob Everett says KiwiSaver has now reached the size where providers might be able to trim fees, but that is not happening, and providers must do more to engage their members.

The regulator has released its latest KiwiSaver report, which shows total assets were up $7 billion from $33.8b in 2016. Investment returns of $2.7b were more than double those of 2016, and are close to the previous record $3b, reported in 2015.

The average management fee per member was $97.82, up from $84.15 in 2016, reflecting an average balance of just under $15,000.

The average administration fee was $30.30. Investment management fees charged by providers rose 21.3% year-on-year from $219.5 million to $266.3 million.

Everett said if a service being provided or the returns were being generated that reflected an investment providers were making, the FMA might be more sanguine about rising fee revenue.

“But we are not sure we are seeing that, and the statistics on member engagement suggest not.”

The report showed low levels of engagement with members of default funds.

Providers are asked to report quarterly about how they engage with default members to encourage them to actively choose an investment and the number of members who took the opportunity to make that choice.

For four of the nine default KiwiSaver providers, the percentage making an active decision fell between 2016 and 2017. All reported fewer than 10% of default members making an active choice.

Everett said providers needed to put more focus on making sure people were “not just sat there”.

“We are getting somewhat impatient on that front,” Everett said.

He said he hoped the advice KiwiSaver members was getting was improving. The FMA has revised its guidance on KiwiSaver advice, in a move to try to make it easier for providers to offer information to their members. Some had reported that the guidance was getting the way of answering client questions.

He said some providers had reported immediately rewriting their training material and guidance for staff to enable them to be more helpful to members seeking information.

It has also partnered with KiwiSaver providers on field trials to see if behavioural insights could help them better connect with members.

Everett said the FMA was keen to ensure that when people transferred to a new provider, or joined for the first time, they were getting good information and guidance.

KiwiSaver being packaged up with other products was something the FMA was wary of, he said.

For the second year in a row, the number of transfers, 172,017, is higher than new members joining, 154,531.

Everett said: “We understand that engaging with default members can be difficult. But the lack of progress in this area by the default schemes is disappointing. Especially when the income from fees paid by default members has increased to $31.5 million, and providers still seem to have little trouble engaging other providers’ members to get them to transfer.

“We have written to the chief executive of each default provider, seeking their commitment to meet their obligations to their default members. At the very least, we expect them to deliver on what they said they would do in their tenders to the Government seeking default status. Or, if they have tried that and it didn’t work, to try something more effective.”

Everett said it had been a good year for KiwiSaver members, with strong market returns combined with Government and employer contributions boosting balances.

But he said people needed to realise it was a long-term investment and not make knee-jerk decisions if markets hit weakness.

KiwiSaver provider Simplicity has signed a deal with variable annuity firm Lifetime Retirement Income, to provide a new KiwiSaver fund that offers retirees an income for life.

It is launching the Simplicity Guaranteed Income Fund, which members can switch to as they approach retirement.

Then they receive 5% of their final KiwiSaver balance for life, from 65. Lifetime’s insurance product covers the longevity risk.

As with Lifetime’s other products, investors who start taking drawdowns later in life receive a higher percentage of their balances as annual income. When investments do not generate enough of a return, investors’ capital will be used to meet payments.

The fund will be invested with a balanced asset allocation.

Lifetime founder Ralph Stewart said it had always been intended that there would be wholesale and retail opportunities. The deal with Simplicity meant it was the only KiwiSaver provider who could offer the option, he said.

Simplicity’s is a simpler product than the standard Lifetime income product, with different capital protection mechanisms. It can only be used by an individual, whereas those who invest with Lifetime direct can take out an investment as a couple.

Simplicity founder Sam Stubbs said there was a lack of investment options for retirees. They were limited to low-interest rate term deposits or too-risky investments that offered higher returns.

“The payments are designed to ‘top up’ NZ Super, so retirees can meet their regular living expenses.”

Simplicity will charge $30 a year for the fund, plus 1.6% a year, which is lower than Lifetime’s standard fee. Stubbs said it should be expected to drop as the fund achieved economies of scale.

The fund is invested in a balanced portfolio of 3000 investments in 23 countries: 55% is invested in investment-grade bonds and 45% in local and international shares. Investments are managed by Simplicity as well as Vanguard.

Stubbs said a law change was needed to allow those over 65 to move to new KiwiSaver schemes, so that those who were already retired could take advantage of the new fund.