KiwiSaver

A recent NZ Funds-commissioned survey by MyFiduciary gives interesting insights into the KiwiSaver life-stages options available.

Most advisers know that around 90% of the variation in a KiwiSaver member’s returns is due to asset allocation and that younger investors should have a greater exposure to growth assets than older investors. 

They also know that KiwiSaver is a scale game, as member balances are too low to adequately compensate financial advisers for providing much more than a cursory financial overview.

It is therefore logical that the legislation is supportive of lower-cost robo alternatives and that the Ministry of Business, Innovation and Employment (MBIE) and the Treasury have announced they will be considering making the default option a lifestages approach.

NZ Funds recently commissioned independent experts MyFiduciary to review the life-stages options available in New Zealand. Here are some selected insights from their report. 

LIFE-STAGES MANAGERS

Nine out of 22 managers offer a life-stages option. Of these, four managers – AMP, ANZ, Generate and Lifestages – change allocations infrequently and by a large amount. The other managers – NZ Funds, AON Russell, Fisher Funds and SuperLife – have smoother adjustment paths.

Leaving a member’s allocation to growth assets unchanged for five to ten years, then dropping their weight substantially overnight, can be a major problem if the rebalancing date coincides with a bad period for equity markets. A smoother glidepath with, for example, annual rebalancing reduces the chance of de-risking at a bad time.

ALLOCATIONS TO GROWTH 

A common theme from academic research into optimal life-stages strategies, and from reviews of actual products in the market, is that current life-stages options are too conservative, with investors being better off if their portfolios did not become less aggressive until much later in their lives. 

The glidepaths of managers in New Zealand tend to be very conservative. At age 65 the average allocation (excluding NZ Funds) is 26% growth / 74% fixed income. In contrast, NZ Funds starts the de-risking process at age 55 from a higher growth allocation. Clients have more than half their portfolio in growth assets until they are in their mid-80s.

Source: MyFiduciary. 1. Post retirement is the average from age 65 to 80. 2. Terminal wealth is measured in today’s dollars, ie adjusted for inflation. Based on a Monte Carlo simulation for a person who starts saving at age 25 with a starting salary of $75,000. Based on 4% contribution rate plus 3% employer  contributions. The terminal wealth evaluation includes each scheme's estimated fund charges including performance fee and administration charges. For more information contact NZ Funds.

EXPECTED OUTCOMES

MyFiduciary modelled a person who starts saving at age 25, has an income of $75,000 that grows through time, and saves 4% of their income (plus a 3% employer contribution) in a life-stages strategy across different managers. 

The average of all balances at 65 years of age was $426,000. Savers who choose NZ Funds, Fisher Funds or SuperLife achieved a higher level of expected wealth at retirement after fees. For example, a saver who invests in the NZ Funds’ LifeCycle strategy would expect to have $459,000 at age 65 (adjusted for inflation, ie measured in today’s dollars). In contrast, savers who selected AMP Lifesteps, AON Russell or Generate Stepping Stones had less expected wealth at retirement of between $395,000 and $399,000 – approximately $64,000 or 14% less.

The MBIE and Treasury Discussion Paper notes that if the Government chooses a life-stages option as the default option, the Government would set the investment mandate of each stage and the ages at which each stage would apply. They also note that a conservative final stage would be too conservative for those approaching retirement, given average life expectancy is much higher than the retirement age. 

Advisers need not wait for the Government to make a decision. Life-stages options which have high expected retirement value are already available in the market.

More than 80% of New Zealanders expect their KiwiSaver and other investments to be invested responsibly and ethically, new research by the Responsible Investment Association of Australasia and Mindful Money has shown.

That is up from 72% last year.

Two-thirds said they would consider switching KiwiSaver provider if their current fund manager engaged in activities that were inconsistent with their values.

Of New Zealanders with KiwiSaver and other financial investments 60% said it was important that financial advisers were knowledgeable about responsible investment options at the same time as prioritising returns on investments.

"The rising consumer sentiment around ethical investing is reflected by the continuing growth in the responsible investment sector in NZ,” said RIAA’s chief executive Simon O’Connor. 

“The challenge lies with fund managers to develop and provide consumers with suitable products which match their interests, concerns and values.”

Mindful Money’s founder and chief executive Barry Coates said: “The survey shows that New Zealanders want to avoid investing in companies that do not reflect their values – human rights violations and labour-rights abuses top the list."

Mindful Money's website allows investors to check where their money is invested.

“The survey confirms last year’s findings that it is not only millennials who want to invest ethically – support is even higher among those over 60 years old. Support is also stronger among women than men, especially in holding strong expectations of ethical performance in their KiwiSaver accounts and other investment funds.”

The survey showed 70% of consumers would be more likely to invest in a product certified by a third party.

The survey showed the vast majority of New Zealanders wanted their savings invested in companies that not only avoided damaging investments, but delivered positive outcomes, notably renewable energy and sustainable water solutions.

Just over half would consider investing in responsible KiwiSaver funds, investments or companies that were aiming to have a positive social or environmental impact within the next 12 months.

Eighty per cent of New Zealanders wanted to avoid investing in problematic companies or sectors, 89% of the public wanted to avoid investing in companies that did not pay their fair share of tax, 86% wanted to avoid social media companies that breached privacy standards, and 86% wanted to avoid companies that practised predatory lending. 

Almost quadrupling the value of the Government's member tax credit for KiwiSaver members might get more self-employed people contributing, the Retirement Commissioner says.

Acting commissioner Peter Cordtz is working towards the completion of the three-yearly review of income policies.

A working group undertaking research for the review said increasing the credit from $521 for every $1,042 contributed a year, so that savers could receive a maximum $2,000, might help boost contribution rates.

While most New Zealand adults are KiwiSaver members, many are not contributing much.

Those who receive no employer contributions may see less value in the scheme.

Commission for Financial Capability research showed only 40% of self-employed people were contributing to KiwiSaver compared to 73% of workers employed full-time.

One in 20 employed New Zealanders is now a contractor, one in 10 has more than one job, and only 38% of employees have been in the same job for five or more years.

The group said KiwiSaver members could receive 50c for every dollar up to $521 then $2 for every dollar up to $1,000,

"This would give members an extra $3,000 in their accounts each year – $1,000 of their own money and $2,000 from the Government," said Tom Hartmann, Sorted editor, who is leading the group.

“Dialing up the Government contribution would level the playing field between employed and self-employed workers, and those out of the workforce, and add extra incentive for members to put in enough to gain the Government matcher each year.”

Cordtz said the idea was worthy of discussion.

“We’re keen to find ways to make the KiwiSaver structure as fair and attractive as possible to all New Zealanders, whether they’re in paid employment, self-employed or taking time out of the workforce,” he said.

“This suggestion could encourage a wider range of people to save more towards their retirement.”

Cordtz will consider the proposal along with public feedback and submissions before deciding on which recommendations to include in his report to Government in December.

Public submissions are open until October 31.

KiwiSaver providers can expect pressure to show what value they're giving members, after an analysis prepared for the Financial Markets Authority showed they charge higher fees than comparable British funds.

The report, produced by actuaries MJW, was included with this year's KiwiSaver report.

It showed that New Zealand fees were higher than those of the UK across all fund types except the most conservative active funds.

KiwiSaver members were paying FUM-weighted average fees for active funds of 1.14% compared to 0.4% in Britain.

Passive funds sat at 0.67% and 0.29%, respectively.

Year-on-year the average fee charged to members increased 13%, to $132.26.

The FMA said, despite its expectation that there would be competitive pressure on fees, they had moved very little over the year to the end of March.

"We will be asking KiwiSaver providers to demonstrate how they are providing value for money for their members, which includes explaining their investment style and how higher fees are justified for services such as active fund management or responsible investment funds."

Director of regulation Liam Mason said, had the MJW report come back showing that New Zealand fees were cheaper than Britain's, the FMA might have decided to reduce the pressure with which it focused on fees.

"It hasn't said that."

He said providers' claims that fees had to be looked at in conjunction with services offered was valid.

The report has already prompted change – Westpac announced it would cut its monthly administration fee from $2.25 to $1 and reduce the management fee on its cash, default, conservative, moderate, balanced and growth funds by 0.1 percentage points.

Kiwi Wealth cut its fees the day after the period the FMA included in its report.

Richard Klipin, chief executive of the Financial Services Council, said there was a clear message in the report about fees.

"Fees are a work in progress but there is already considerable work going on across the industry to reduce fees and to deliver a greater range of fee structures and other product innovations to Kiwis.

“With the growth of the KiwiSaver market there is now real competition for consumers to choose from to ensure that they are getting value for money and that they are paying fees which reflect their needs."

The report showed that there was $1.04 billion in withdrawals by people aged over 65 in the year, and 23,000 of those people left the scheme,

He said that was a key area in which advisers could help.

Making their KiwiSaver savings last through retirement was a complex proposition.

That end of the KiwiSaver journey could be the most important for financial advisers to offer guidance in, he said.

Mason said it was positive that six out of the nine KiwiSaver default providers reported an increase in the percentage of members who had made an active choice on their investments.

“This has been a key focus for us over the past few years so it is great to see more than 52,000 default members made an active decision about their investment over the past year – up significantly from just over 28,000 in the prior year.”