KiwiSaver

KiwiSaver has changed New Zealand’s managed funds industry but it has had little effect on household finances so far, a superannuation researcher says.

Michael Littlewood, co-director of Auckland University’s Retirement Policy and Research Centre, analysed the impact of KiwiSaver on New Zealanders’ finances, based on data from the Reserve Bank.

“With 2.2 million members and more than $19 billion in assets, it seems that KiwiSaver might have made a real difference to New Zealanders’ saving habits,” he wrote in the latest edition of the RPRC’s Pension Briefing bulletin.

“However, apart from those headline numbers, we do not really know whether New Zealanders are saving more; or even whether KiwiSaver has helped to lift the aggregate numbers.”

Littlewood used two sources of data from the RBNZ: the managed funds survey (MFS) and the key household statistics survey.

His analysis covered the period from December 2003 (when the RBNZ changed the methodology of the MFS) to September 2013.

Based on the data, he concluded KiwiSaver was a “relatively insignificant influence” in New Zealanders’ financial lives, although that could change.

“In summary, KiwiSaver, despite its growth from a standing start in July 2007, still plays a very small part in New Zealand households’ financial affairs and there may be offsetting behaviour in other parts that reduce even that small impact,” Littlewood said.

Littlewood found total managed funds in New Zealand increased by 55% ($33 billion) to $88 billion during the ten-year period, with 58% of the increase ($19 billion) attributable just to KiwiSaver.

However, managed funds represented only about a third (34%) of New Zealanders’ total financial assets, which stood at $256 billion as at September 2013.

“Since KiwiSaver started, gross household financial assets (including KiwiSaver) have grown by $66.2 billion from $189.5 billion to $255.7 billion, up 35% in six years,” he said

“Of that increase, just $19 billion (29%) can be attributed to KiwiSaver. What we do not know and can never know, is whether financial assets might have grown by that $19 billion without KiwiSaver’s intervention.” 

And while financial assets nearly doubled from $139.4 billion at December 2003 to $255.7 billion at September 2013, their value relative to household incomes only increased from 1.7 to 1.88 in that time.

Managed funds actually fell as a proportion of both household assets and disposable income between 2003 and 2013, although they had improved since 2008 when the GFC hit.

Littlewood also highlighted the extent of taxpayer subsidies to KiwiSaver ($4.9 billion) and the high amount invested in fixed interest (53.6%).

“If continued, savers will probably end up at retirement with significantly lower balances but they also face an increased risk from unexpected inflation. Growth assets are normally the best protection for that.”

Having an above-average allocation to global shares pushed ANZ’s OneAnswer Growth Fund to the top of the Melville Jessup Weaver KiwiSaver performance charts.

The quarterly survey reports on the performance and risk characteristics of the majority of New Zealand’s investment funds.

It found the OneAnswer Growth KiwiSaver fund returned 19.9% in the 12 months ended December, compared to an average of 17.8% for growth funds.

MJW principal Mark Weaver said the performance of the OneAnswer Growth Fund’s performance was boosted by the fund’s high allocation to growth assets, nearly 83%, and the strong performance from the underlying global shares.

“It was a good year for sharemarket investors with global markets up 27% and the NZX50 up 17.9%,” he said.

Global bond markets were up just 2.2% and the local government bond index was in negative territory because of the New Zealand economy’s strong outlook.

Of the balanced funds, the OneAnswer offering also topped the sector, with a return of 16.3% against an average 12.5%.

The fund had nearly 68% in growth assets, a reasonably high level for a balanced fund.

The best performing conservative fund was Mercer’s. It was up 7.4% and had a 38% allocation to cash.

Weaver said over the last one-, three- and five-year periods KiwiSaver funds have performed in line with their risk profiles.

Average annual returns over the five years to December 31 for growth, balanced and conservative options were 10.6%, 9.1% and 6.2% respectively.

“With the major market dislocation of the global financial crisis now five years behind us, it seems asset class returns are starting to conform again with long-term historical trends,” he said.

Buoyant stock markets helped KiwiSaver growth funds achieve another solid year in 2013, according to new figures by research house Morningstar.

But despite the continued strong performance of growth funds, the bulk of KiwiSaver money remains in more conservative options.

Aggressive funds were the top performers in the year ended December 31 with a total return of 15.9%, followed by growth funds which achieved a return of 14.6%.

Balanced funds were next, with returns of 11.3%, well ahead of moderate funds (7.3%) and conservative funds (including default funds), which returned 5.8%.

Default funds, which have $5 billion of investor money tied up in them, returned 5.5% for the year.

While the short-term results are encouraging for growth investors, the figures show they are also better off than more conservative KiwiSaver investors over the longer term as well.

Growth funds have returned 9.1% per year over the past three years, ahead of balanced funds (8.0%) moderate (6.8%) and conservative (5.9%). 

Over the past five years growth funds have average 10% per year, bettered only by aggressive funds (10.8%) and ahead of balanced (8.7%), moderate (7.5%) and conservative (6.3%).

The Mercer Conservative fund was the top default fund in 2013, returning 7.4%, almost 70% better than the worst-performing default fund, the Tower Cash Enhanced fund, which achieved 4.4%.

Morningstar’s figures show KiwiSaver continues to grow at a rapid pace, increasing in total funds under management by almost $4 billion (29%) during the year to reach $17.6 billion at year’s end.

However, more than a third of that money ($6 billion) is in conservative funds, dwarfing the amount in growth and balanced funds ($3.3 billion each), moderate funds ($2.6 billion) and aggressive funds ($1.1 billion).

The KiwiSaver market is still being dominated by a handful of large providers, with more than a quarter of total funds managed by one company (ANZ).

ASB, the next biggest provider with $3.6 billion under management, has the largest product with more than $1.8 billion invested in its ASB Scheme Conservative (a default fund).

The other providers with more than $1 billion under management are AMP ($2.8 billion), Westpac ($2.3 billion) and Fisher Funds, which has swelled to $1.96 billion after acquiring default provider Tower Investments. 

Mercer, the sixth-biggest provider, is likely to cross the $1 billion mark this year after reaching $974 million at year’s end.

Advisers may have to wait longer than expected for a boom in demand from KiwiSavers looking for financial advice, new figures suggest.

Inland Revenue’s sixth annual review of KiwiSaver shows that while investors are becoming more active in their choice of fund, most are still making the minimum required contribution.

The report, for the 12 months to June 30 this year, shows that 67% of the 2.15 million KiwiSaver members have chosen their own scheme, up from 65% last year and only 49% back in 2008.  In 2013 there were 136,167 transfers, an increase of 24% on last year.

However, the report also shows that 58% of members are only contributing the minimum amount of 3% of their salary or wages and their employer 3%.  This is roughly the same as last year (59%) before the minimum employee and employer contribution rate was raised from 2%.

KiwiSaver has often been cited as a future catalyst for growth in the financial adviser market, but Financial Services Council chief executive Peter Neilson says the IRD figures show it will still be a few years before this happens.

“There will be an increased market for advice but if you look at the average numbers they are about $8-10,000 per person.  People with $10,000 are unlikely to be major customers of advice but they may be in ten years’ time.

“Over time it’s going in the right direction but the vast bulk of people have got very modest balances.”

And the large number of people contributing the minimum will cause balances to grow more slowly, Neilson says.

“The problem is you’ve got a large number of people in KiwiSaver contributing at relatively small rates.  You’ve also got a skew towards young people.  People in their 20s are probably not going to want advice until they are in their 30s and 40s.”

Neilson says the FSC is pleased to see more KiwiSaver members picking their own funds, but many don’t know they are in conservative funds.

FSC modelling shows that if someone on the average wage contributing 6% stays in a conservative fund for the next 40 years they’ll end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio and $250,000 less than being in a growth fund. 

Conservative funds suffer the highest effective tax rate which increases the savings required to get to a comfortable retirement, the FSC says.