KiwiSaver

A financial adviser who offers digital advice on KiwiSaver says he’s seen a “huge uptick” in demand for help during the Covid-19 disruption – and those who have received guidance have made it through the market volatility in better shape.

Clive Fernandes runs NationalCapital.co.nz, an online platform that helps New Zealanders understand the KiwiSaver scheme and what fund and provider might be best for them.

He said the downturn in March has shown many people that KiwiSaver was not just a high-yielding savings account – and that they needed to know more about it.

“We’ve seen a lot of people searching online and definitely see a much larger number of them looking for advice.”

The questions were often not sophisticated, he said, and related to people wondering whether they were in the right fund.

Fernandes said approximately 3.74% of members from KiwiSaver growth funds and 3.01% of KiwiSaver members in balanced funds switched in the March quarter, mostly into more conservative funds. That would cost them over the long term.

“For this group alone, we estimate the collective loss of funds to be $925,664,182 in 10 years from now or $3,578,215,119 in 20 years.”

He said, in some cases, advice from his team had helped some of those clients to realise they had made the wrong choice and to switch back.

In general, investors in funds with good advice representation seemed to have got through the disruption with less panic, he said.

The growth funds which took the smallest hit, in terms of investor base, were Mercer Growth, which gained 2.3% and Milford Active Growth which only lost 0.4% of investors. Both Mercer and Milford work with advisers outside of their organisation to provide KiwiSaver advice to their investors. “These figures show those KiwiSaver members who had greater access to advice, were less inclined to switch, suggesting the value of advice – quite literally – particularly in a time of uncertainty,” Fernandes said.

“If those switchers had access to the right advice in the first place, the number of people switching funds would’ve most likely been significantly less. The question now begs, will they seek advice to avoid missing out in the long term.”

He said access to advice has been a known problem in the industry for a long time and KiwiSaver providers needed to add it as part of their service offering and fee structure. The industry, regulators and Government needed to consider the value of advice, he said.

“Ultimately we need to ensure that Kiwis end up better off in the long run. Just aiming to have the lowest fees to attract new clients is not in the long-term interest of KiwiSaver members.”

The Financial Markets Authority says KiwiSaver providers have been making efforts to advise worried investors during recent market disruption.

Morningstar has estimated that KiwiSaver members moved $1.4 billion to more conservative funds in March, about 2% of all the money invested in the scheme.

For many, that will have locked in losses at the bottom of the market.

Providers reported fielding hundreds of inquiries – and some industry commentators expressed concern that many investors were moving funds without a full understanding of the implications.

Asked whether the regulator was happy with the industry response to the switching behaviour, spokesman for the Financial Markets Authority said it had engaged with KiwiSaver providers throughout the Covid-19 outbreak to understand how they were responding to the crisis and helping investors.

“We are aware that many providers have been making efforts to advise customers or encourage them to pause and consider their options before switching funds. We have previously said that KiwiSaver providers should be providing general (‘class’) advice to members at this time.

“We note that switching behaviour may have been influenced by many providers offering easy online switching options, often without human interaction. Additionally, investors who have their KiwiSaver with a bank are usually able to see their KiwiSaver balance from their banking app.

“The market volatility has revealed that some KiwiSaver members were likely taking on more risks than they could afford, given their age, risk profile or investment goals. Some members may not have known their risk tolerance until the recent market volatility.”

Adviser Clive Fernandes has estimated that switching behaviour could have cost investors $3.5 billion over their investing lifetimes.

The FMA had emphasised to the public that it was a long-term investment and they should think before switching, he said.

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 Community Trust.

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.

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.