KiwiSaver

A Court of Appeal ruling has given KiwiSaver balances more protection than other retirement savings when someone enters bankruptcy – a situation that has the Ministry of Business, Innovation and Employment concerned.

MBIE wants to change the law after the ruling put KiwiSaver funds beyond the reach of the Official Assignee.

MBIE is seeking submissions on its options to create a uniform policy approach to retirement savings in bankruptcy.

​When a person is declared bankrupt, assets such as houses or direct investments into managed funds are normally accessible to repay creditors. 

But the treatment of the assets held in KiwiSaver accounts and other retirement schemes differs depending on the type of scheme.

At the beginning of last year, there were 5559 bankrupts with KiwiSaver accounts with a total known value of over $27.3 million. The average value of these accounts is $6070.

One of the bankrupts, Mr T, has been a member of a KiwiSaver scheme since 2007 and was adjudicated bankrupt in June 2010 at the age of 25. His proofs of debt amounted to $26,254 although there may have been other unproved debts. There are no assets in the bankrupt estate other than Mr T’s KiwiSaver interest amounting to $11,860.46 at the date of adjudication.

The second bankrupt, Mr H, has been a member of a KiwiSaver scheme since January 2008. He was adjudicated bankrupt on Novembr 4, 2010, at the age of 34. Claims notified by creditors amounted to a sum in excess of $32,000 although proofs of debt for only $9,583 were actually received. Mr H has no assets other than his KiwiSaver account and a small tax refund. His KiwiSaver interest totalled $10,805.98 at the date of adjudication.

The Official Assignee asked Trustees Executors to release the funds in the KiwiSaver accounts of the two bankrupts under the significant financial hardship provisions of the KiwiSaver Act.

It refused to release the funds, contending that the KiwiSaver interests of the bankrupts were not property and did not vest in the Official Assignee on their bankruptcy. It  took the view that, in any event, the significant financial hardship provisions of the KiwiSaver Act would not permit the early release of the funds.

The Court of Appeal backed Trustees Executors.

But other retirement schemes do not receive the same level of protection. Access to these savings to repay creditors is governed by the rules set out in the individual scheme’s trust deed and the Insolvency Act 2006.

MBIE has set out three broad options for reform.
Option 1: all retirement savings of a bankrupt member to be available to the Official Assignee (excluding any Crown contributions).
Option 2: allowing all personal retirement savings contributions to be accessed by the Official Assignee (excluding Crown and employer contributions).
Option 3: allowing the Official Assignee to access a fixed percentage of all retirement savings, including Crown and employer contributions.

Commerce Minister Paul Goldsmith said the options were designed to start discussion and that further alternatives were open to consideration.

A further option is that none of the retirement savings ought to be available.  An exception would remain for voidable payments made into the scheme prior to bankruptcy.

It is also asking whether foreign savings should be made available, and whether it matters that easy liquidity of retirement savings means they are accessed first, which may allow bankrupts to exit bankruptcy sooner without having to sell other assets such as a house.

Submissions close at the end of September.

A trial has begun that will investigate the effectiveness of behavioral interventions to help KiwiSaver members make better financial decisions.

The six-month project is an initiative from Kiwi Wealth, the Financial Markets Authority (FMA), the Commission for Financial Capability, and the Ministry for Business Innovation and Employment (MBIE).

It will test how changes to the design and phrasing of enrolment communications can prompt people to assess and change their fund to suit their retirement expectations. 

The trial, beginning this week, is expected to include approximately 3000 new entrants to the Kiwi Wealth KiwiSaver Scheme.

Joe Bishop, Kiwi Wealth head of retail wealth and marketing, said simple changes to how providers spoke with their members could have a big impact on their financial decisions and future retirement income.

“We’ve observed that new KiwiSaver members are most likely to switch from default funds within the first month of enrolling.  The actual number of people switching is still quite small however, with only about 5% of members doing so,” he said.

“Currently, provider communications to new members is dull, very transactional, and has little emphasis on their future retirement income.  With this trial, we’re tweaking our communications so KiwiSaver members are prompted to make decisions now with the end goal in mind, growing their retirement income.

“Improvements to the design of the welcome letter and how words are phrased might seem like simple details, but the science suggests they’re powerful motivators.  When you consider there are 2.5 million people enrolled in KiwiSaver, the smallest upswing in people’s engagement with their fund could lead to a massive improvement on Kiwis’ retirement savings.”

In April, the FMA published a cross-government paper which assessed how personal preferences and beliefs can influence financial decision making.  It found that people typically have a natural bias for the status quo which makes them better at day-to-day money management but less inclined to consider long-term financial planning.

To help people overcome this bias, the paper cited four interventions that have shown to result in effective and measurable behavioural change.  Known as the EAST framework, it says communications could be more persuasive if they are:

·         Easy – simple language and reducing the perceived hassle with changing funds.
·         Attractive – framing communications so that its interesting with a strong call to action to change funds.
·         Social – showing that others are changing funds and improving their retirement income.
·         Timely – prompt action when people are likely to be most receptive (when they first enrol).

Paul Gregory, FMA director of external communications and investor capability, said: “The best time to help New Zealanders focus on making good financial decisions is when they’re actually doing it and so this is where providers have an essential role. So, as well as the work government agencies are doing, we look to industry to use these insights positively: in their product design and marketing, disclosure, and in their sales processes for all products including KiwiSaver.”

 

New Zealand’s investment management industry is worried about the influence and domination of the big banks on KiwiSaver, a new survey has shown.

BNP Paribas Securities Services has released the result of research undertaken with local superannuation funds, KiwiSaver providers, asset managers and financial adviser groups.

New Zealand head Doug Cameron said the retirement savings scheme had been transformative.

Before KiwiSaver launched, the funds management industry had been in the doldrums, with a stagnant employer and retail superannuation industry and the non-super retail unit trust market in serious decline, he said.

“Just nine years later that state of affairs has been reversed: KiwiSaver and the wider retail unit trust markets collectively manage over $60 billion – at the moment split fairly evenly between the two,” he said.

“While the $20 billion-plus employer super industry will undoubtedly shrink following a regulatory overhaul, it won’t disappear completely. The wholesale market is sustained by a vibrant charity and community trust sector and, increasingly, Maori investment funds.”

He said the market was in good health and poised for growth.

But despite its successes, Cameron said there were still structural issues with the KiwiSaver market that respondents wanted to see addressed.

Participants expressed concern about the domination by banks (27%) and local access to advice (20%), coupled with conservative investment choices (19%). They said compliance made it hard to obtain cost-effective advice, and members were sometimes “churned” between banks without enough education.

Some respondents said the market was too small to support all the providers and some would end up having to merge. More than 20% expected to see more consolidation of KiwiSaver over the next 12 months.

But meeting regulatory change was seen as the biggest trend for the next year by the majority of respondents. They said they expected to see more confusion among investors, homogenisation of financial advice and portfolios, pressure to reduce fees and increasing costs with no direct added value.

Keeping up with new regulations while complying with existing rules, along with reporting to regulators, were the top worries for respondents, with over a third (35%) of those surveyed ranking these factors as most likely to keep them awake at night. Respondents cited Financial Markets Conduct Act compliance as one such regulatory burden.

But Cameron said the survey found the FMCA also provided some positive contributions, such as improved processes, raising industry standards, and improved disclosure via greater simplicity and consistency.

The respondents expected global equities to be the best-performing asset class over the coming year.

A new, low-fee KiwiSaver scheme being launched today will be a good fit for financial advisers who work on a fee basis, its managing director says.

Former Tower Investments boss Sam Stubbs is launching Simplicity, a not-for-profit scheme run in the style of health insurer Southern Cross.

It will be run by a charity and its launch is being funded by Stubbs personally.

Stubbs said he wanted to create a “Vanguard of New Zealand” – a low-cost model that would shake up the KiwiSaver industry in this country. He said the providers had been allowed to become too complacent and members were paying too much as a result.

“There’s the Vanguard effect – as soon as Vanguard enters the market, the whole thing changes.”

He said KiwiSaver had become a “gravy train” for the big Australian banks in New Zealand.

“Compared to similar savings schemes in other developed countries, fees are very high. Profits for KiwiSaver managers are at $150 million now. Without change, we think they will be at $1.3 billion by 2030.”

Simplicity will charge $30 a year in administration fees and 0.3% in fund management. Stubbs said that was less than half the industry average. The same fee will be charged across all of Simplicity’s funds. Of that fee, 15% will go to a charity that will work to improve financial literacy.

Simplicity will offer advisers no trail commission, unlike other providers such as Generate and Grosvenor, but would suit those who worked for fees, he said. “If they can add value for their clients by using the product and maximize returns, then that helps them justify their fees. For fee-based advisers, this is very suitable. For those on commission, it’s less so.”

Simplicity intends to have more than 9000 investments in 23 countries in each fund. Overseas investments will be managed by Vanguard. Each investor’s savings are held in custody by Public Trust.

Stubbs said he also had plans to branch out into other financial products eventually, including life insurance, which he said was much more expensive than it needed to be.

Simplicity trustees include Peter Neilson, former chief executive of the Financial Services Council and Craig Richardson, chief executive of Wynyard Group.

Directors include Kirsty Campbell, formerly of the Financial Markets Authority, and Mark FitzGerald, former director of private banking and wealth at Westpac.