KiwiSaver

KiwiSaver providers are raising questions about a series of prescribed assumptions they will have to use to show clients' KiwiSaver balance projections – including that defensive funds will lose money in real terms each year.

The Financial Markets Conduct Amendment Regulations 2019 require annual statements sent to KiwiSaver members from next year to include a total retirement savings and retirement income projection.

The Government says using the projections will help people to understand how their current contributions and investment decisions will affect their retirement savings over time.

Requiring standard assumptions would ensure investors were "comparing apples with apples", it said.

The Financial Markets Authority has since told providers that they will need to use those prescribed assumptions in their online KiwiSaver calculators, too.

But not all providers are convinced.

Murray Harris, head of wealth management at Milford, said no one in the industry had expected calculators to be captured by the requirement.

"There are so many different calculators out there and all calculators use different assumptions."

He said he could see some value in industry standardisation but there should also be the option to provide other calculators to clients who wanted to look at different aspects of the scheme.

Among the assumptions that providers will have to use is that inflation will run at 2% a year but defensive funds will only return 1.5%.

That means, in real terms, they lose money each year.

Harris said that would be a "difficult conversation to have" for providers of defensive funds.

The assumptions also apply the same expectations to a balanced fund with 30% growth assets as to one with 70%.

The MJW assumption looked conservative across all fund types, Harris said, and also assumed that investors would go to a conservative portfolio at 65, which was not always the case.

“Homogenisation is great in theory but in practice we need to make sure we can have valuable conversations with members where we can guide people through different scenarios.”

Other providers said they were having productive discussions with the FMA about the best way forward.

One, who did not want to be identified, said there should be a way to achieve the results that the regulators wanted without getting to standardisation at fund level.

A new robo-advised KiwiSaver scheme, partly-owned by sharebroker Hobson Wealth, is set to launch in a month's time, designed to offer better investor outcomes.

Founder Rupert Carlyon said Kōura Wealth had received its MIS licence this week and planned to launch to the public in three or four weeks' time.

Hobson Wealth owns about half the shares in the company.

Carlyon said Kōura would not invest into Hobson's funds, however. It will have a passive strategy, investing into international passive funds and building its own domestic passive funds.

He said the KiwiSaver market was "kind of working" but too many people assumed that once they were in a KiwiSaver fund, someone else was dealing with it and they did not have to worry any further about retirement savings.

"That's about as far from the truth as you can get," Carlyon said. "We need to do a much better job of helping people make better decisions."

Kōura will only offer roboadvice. Carlyon said while people needed help, they were generally not willing to pay for it.

"How do we create a way to get people the help they need without adding a big cost upfront?"

Carlyon said Kōura's fees should fall "in the pack" of other passive managers. Members would effectively get free advice, he said.

"That's where the world is going to go. From a community perspective, I think everyone should be doing this. It's the logical next step. Technology is allowing us to do far more than we could 10 or 12 years ago when KiwiSaver first launched, why not just do it?"

Carlyon said it was something he had been thinking about for years.

There have been a number of new KiwiSaver providers enter the market in recent years but Carlyon said their success proved that there was room for innovation.

As balances became higher, people were paying more attention to what was on offer, and realising there were other options, he said.

Before launching Kōura, Carlyon was director of mergers and acquisitions at KPMG and spent time in the UK.

 

Default KiwiSaver schemes may no longer be conservative, and could be forced to charge lower fees, if Government proposals for a revamp of the scheme are adopted.

The Ministry of Business, Innovation and Employment (MBIE) has released a discussion document as consultation opens on the KiwiSaver default fund system.

MBIE noted that there were about 715,000 people in default funds, 430,000 of whom had not made an active choice to be there.

That represented about 15% of all KiwiSaver members.

But there are concerns that the settings of default funds mean that those members will not achieve the retirement savings outcomes they could in another fund.

One of the proposals is to adjust the risk settings of a conservative fund.

MBIE said the current investment mandate reflected the idea that the default fund had been expected to be a transitional "parking space" for members. "It was assumed that an ability to earn higher returns under a more growth‐oriented approach would encourage members to move out of the default funds."

But that had not happened.

The discussion document suggested either moving to a "life stages", balanced or growth mandate. 

“The conservative risk setting was intended as an interim arrangement for members while they considered moving to another fund. However, after over 10 years of the KiwiSaver scheme large numbers of people are staying in default funds, despite the potential gains from moving to a higher-growth fund," MBIE manager of financial markets Sharon Corbett said.

The paper said the Government would probably set the investment mandate for each stage of a life stages approach and the age at which each would apply.

"In this regard, we have received informal feedback that a conservative final stage would be too conservative for those approaching retirement, given average life expectancy is much higher than the retirement age. This could be mitigated by increasing the age at which members are switched to the final stage, or making the stages less conservative."

Another option would be to have an initial conservative period during which providers would engage with members to determine their needs.

MBIE said a change away from conservative default funds could affect those who wanted to buy a first home.

"Those individuals could be exposed to negative effects on retirement balances if they withdraw funds when the market is in a down‐cycle. However, the chance of actual losses remains fairly low … for many people, any negative consequences in the short term would be less significant than the long‐term benefits of a higher‐growth fund."

More than 84% of first-home withdrawals were from members who actively joined their KiwiSaver provider, MBIE said.

Corbett said another proposal was to reduce default provider fees.

“Over time, fees can make a big difference in the amount of money people will have to retire with. We’re seeking feedback on the value members get from the fees they pay.”

MBIE noted that it would expect to see percentage-based fees decrease as FUM grew.

"In relation to KiwiSaver fees in general, the FMA has stated publicly that ‘we would have hoped that as funds under management grew, we would have seen fees decline faster, and that members would be getting advantages of economies of scale that come with growth’. In addition, we have had feedback that some fund managers with active approaches are more active than others, with fees not always justified.

"While we accept that fees are only one component of a value‐for‐money service, we want to see reductions in fees for default funds as a result of this review and subsequent procurement process. Default providers get a steady stream of new customers and reputational benefits as a result of being a default provider. Given these benefits, the Government expects that providers will offer more competitive fees in order to enhance outcomes for members."

Options for fees included a Government-set fee for default providers – though MBIE noted it could be difficult for the Government to set this in a way that was not too high.

Alternatives were considering fees in the procurement process to select default providers, requiring percentage-based fees to drop over time, prohibiting fees for those aged under 18 or with low balances, or banning annual fees.

MBIE is also asking whether the number of KiwiSaver default providers is right, whether default provider should be used to promote investment and how settings could be used to develop capital markets.

Consultation is open until September 18.

 

 

 

 

Morningstar warns the past quarter was “about as good as it gets” for KiwiSaver returns.

It has released its latest KiwiSaver quarterly survey, which showed all KiwiSaver funds reported positive returns in the June quarter.

Average multisector category returns ranged from 4.2% for the aggressive category to 2.1% for the conservative category.

The top performers in their peer groups were Milford Conservative, Milford Balanced, Aon Milford and Generate Focused Growth.

Tim Murphy, director of manager research at Morningstar, said it had been a strong quarter for both bonds and equities, so no matter what type of KiwiSaver fund people were in, they would have done well.

The S&P/NZX 50 Index was up 6.7%, and 19.2% year-to-date. Australian share performance was also strong, S&P/ASX 200 index was up 8% over the quarter and 11.6% over the year.

“The key message is not to let that make you complacent about what returns to expect. That’s about as good as it can get. Always keep that in mind," Murphy said.

KiwiSaver assets on the Morningstar database grew to more than $57.2 billion in the quarter, from $48.7 billion a year earlier.

ANZ still had the biggest market share at $14 billion.

Murphy said he expected to see more KiwiSaver providers differentiating on fees in future.

But he said he had no concerns about the level of fees charged overall.

Australia’s superannuation schemes, which had a much larger FUM base than KiwiSaver, had similar fees, he said.

“While Morningstar advocates for lower fees over time in general and economies of scale, in aggregate we think fees are reasonable.”