KiwiSaver

A decision to remove the $1000 incentive for new KiwiSaver members was made on the basis of inaccurate information, the Financial Services Council says.

This year’s Budget axed the kickstart, on the basis of a Treasury report that said the scheme offered the Government little value for money.

In response, the FSC has commissioned its own report from the NZIER.

Chief executive Peter Neilson said the Government should not have made the decision to remove the $1000 incentive on the basis of the Treasury report.

He said KiwiSaver had been shown to be effective in getting middle-income New Zealanders saving, and diversifying their investments.

He said the NZIER report focused on the people KiwiSaver was designed for – those who were likely to have a lower standard of income in retirement than they had when they were working.

The report found KiwiSaver was likely to lead to an increase in net worth and standard of living for those people.

NZIER’s report said KiwiSaver should also lead to more diversified investment portfolios in New Zealand, reducing the concentration risk of having much of New Zealanders’ money tied up in housing.

NZIER principal economist Aaron Drew said: “If there is a really bad economic shock which compromises the ability of a future government to pay for New Zealand Super, KiwiSaver is one of the key things that is potentially there to mitigate that risk.”

Neilson said the NZIER report found the evidence for Treasury’s argument was too narrow because it used data only from the global financial crisis years.

He said it did not consider that KiwiSaver attracted young and low-income people who would not usually have been involved in formal savings schemes.

“The analysis simply compared the results for the people in KiwiSaver with those who were not, as opposed to those in the target audience who joined KiwiSaver compared with those in the target audience who did not,” Neilson said.

“We need to compare apples with apples. People on a benefit can’t afford to save and are likely to receive a higher income from New Zealand superannuation than they received during their adult lives on a benefit anyway. At the other end of the scale, people who were saving for retirement by investing in rental property or a farm would be unlikely to use KiwiSaver other than to just pick up the KiwiSaver incentives. For this group KiwiSaver would probably not increase their savings, it would only change the composition of their savings. Neither of these categories were in the target group for KiwiSaver and should not have been used for comparison.”

It is difficult for people nearing retirement to get access to the financial advice they need, it has been argued.

Simone Robbers, the Financial Markets Authority’s director of primary markets and investor resources, and David Boyle, group manager for investor education at the Commission for Financial Capability, fronted media yesterday at a press conference to discuss their recent report on New Zealanders’ retirement experiences.

The research showed that a large number of New Zealanders over 50 did not have a financial plan in place for their retirement.

Those most likely to have a plan were those who thought they already had the money to live the sort of lifestyle they wanted in retirement, those over 60 and those with annual household incomes over $30,000. Retirees with a financial plan tended to have a more comfortable retirement.

Robbers said whether those nearing retirement drew up a plan with an adviser or whether they did it alone was secondary to the act of planning itself.

She said New Zealanders “needed to start somewhere”. For some, that would mean going straight to an adviser. Others might work through other tools first. “Both starting points are good and better than what we are seeing at the minute.”

But Boyle said a key issue was where New Zealanders could find advice and whether they would pay for it. “It’s hard to get good factually-based information, let alone advice.”

He said adviser businesses had traditionally been geared up to deal with those who already had a significant lump sum saved, but New Zealand also need to think about the needs of accumulators, and develop a better framework to do that.

Robbers said New Zealanders needed to be encouraged to seek advice and consider a lump sum, such as from KiwiSaver, as a way to generate income.

Boyle said he had challenged KiwiSaver providers to think about ways they could provide a better service to those nearing retirement. “At the moment you get a letter from IRD saying you are eligible for NZ Super and then maybe at the same time you get one saying you have got this lump sum, what do you want to do with it? I think we can do better. Don’t send out a letter three months before they hit 65, think about message and ideas at 50 to act as a catalyst.”

A little bit of financial planning could go a long way, Robbers said. “But tools need to be easy to access and easy to find.”

ANZ, the largest KiwiSaver provider, said it provided free financial planning services to its members.

But ANZ Wealth General Manager Products and Marketing Ana-Marie Lockyer said few took advantage of it.

Morningstar has given bronze ratings to Mercer’s KiwiSaver schemes.

Bronze, silver or gold ratings are used to indicate Morningstar’s level of conviction in its recommendation of funds.

The research house said the insights of a global team of investment professionals and extensive diversification at the asset and fund level were characteristics that make Mercer KiwiSaver an attractive option.

“Mercer takes a long-term view when building its portfolios and will venture into esoteric asset classes, such as unlisted assets and alternatives, to source value. The portfolios boast the widest investment opportunity set in the market, and diversification across managers is high. For instance, no other KiwiSaver providers we cover invest into unlisted infrastructure or natural resources.”

Morningstar said that diversification meant Mercer funds performed well when traditional asset classes were performing poorly but lagged when markets were strong.“

The local team has the flexibility to tactically tilt the portfolio to reflect short-term views and exploit mispriced opportunities. This has the potential to add value but execution is paramount and introduces market-timing risk. This was the case in 2014 when the team mistimed the bottoming of sovereign bond yields, an underweight position detracting from performance. However, we are confident the team can add real value over the longer term.”

It said Mercer was competitively priced compared to others in the market but long-term performance was weighed down by a poor year in 2012.

Many New Zealanders have the mistaken belief that once they get to 65, they have to pull their money out of KiwiSaver, AMP New Zealand’s general manager of investments and insurance, Therese Singleton, says.

She said leaving money in KiwiSaver through a retiree’s decumulation phase offered more freedom and potentially better returns than term deposits.

“In the past, many retirees have favoured term deposits because they are easy to understand and viewed as low risk. With the AMP KiwiSaver Scheme we have a great investment alternative for people over the age of 65.”

In the last financial year, the AMP KiwiSaver Scheme Conservative Fund earned 8.2% returns and for the same period, one-year term deposit rates for the major banks ranged from 4-4.35%.

Interest rates and returns from KiwiSaver scheme provider conservative funds may vary from year to year, but Singleton said KiwiSaver also offers retirees additional benefits.

“Unlike a term deposit, where you may have to wait for 31 days to take your money out, once you reach 65 you can make partial or full withdrawals from your account whenever you need to as long as you have been a KiwiSaver member for five years,” she said. “You can also continue to make contributions should you decide to return to work but what many people don’t realise is that once you reach 65, if you leave KiwiSaver, you can’t get back in. Maintaining your KiwiSaver membership into retirement means you can keep your options open.”

She said KiwiSaver was one of the few products that had its fees formally regulated, so it offered good value for money compared to other investments such as managed funds.

Even people who were nearing  retirement could join the scheme,  collect member tax credits for five years and then be left with an effective and affordable product to help them manage their retirement income, she said.

Some would need to change their fund to a more conservative option if they were reliant on their KiwiSaver funds but other retirees could opt for a riskier investment and treat it as an investment vehicle for part of their retirement plan.

“Plus, with a scheme like the AMP KiwiSaver Scheme, you have access to professional expert advice that your bank may not offer. Your AMP adviser is there to help you choose the right fund for your age and risk profile and to help you to make the most of your savings.”