KiwiSaver

Calls for changes to KiwiSaver are growing louder.

Milford is the latest KiwiSaver provider to call for changes to the $100 billion scheme, saying the current setup won’t support members’ retirement aspirations.

Murray Harris, head of KiwiSaver and Distribution at Milford, says although many members are contributing the minimum 3% of their salaries, that is not enough, given the importance of the scheme to Kiwi's financial futures.

Recently, Simplicity founder Sam Stubbs told Good Returns TV it's time to make changes to the scheme. (You can watch the video here).

Added to these calls the Financial Services Council outlined areas it wants to see changes in.

Chief executive Richard Klipin recently said: “The FSC is calling for a full review of KiwiSaver".

Harris says the scheme has been very successful in gathering membership, but several changes need to be made for KiwiSaver to better support New Zealanders in retirement, including:

• A gradual annual increase of 0.5% to contribution rates, reaching a total contribution of at least 10%
• Tax relief or concessions on contributions rather than PAYE rates to incentivise members to contribute
• Potential decoupling of employee and employer contributions for lower income workers so they could receive employer contributions, even if not contributing themselves, with potential tax relief for the employer

Harris points to Australia as a good example for New Zealand to follow. Its compulsory savings rate is 11%, increasing to 12% by 2025. Contributions are generally taxed at a flat rate of 15%.

“People have this mindset that if they are in KiwiSaver, they’re okay,” Harris says. “But really they’re probably only saving about half as much as they need to be.

"As an industry, we’re looking at how we can help people understand how much they need to save for a comfortable retirement and then help them achieve that. Advice and education is really important, as well as an upgrade of the KiwiSaver scheme.”

The FSC says “we know there are substantive and strategic issues around contribution levels, the age of retirement, the 25% gender retirement gap, and the fact that 53% of us aren’t able to access $5,000 in time of emergency.

“These require serious attention if we are to make KiwiSaver a best in class system globally."

Fee revenue from KiwiSaver dropped 8.1% in the year to 31 March 2023 says the latest Financial Markets Authority’s KiwiSaver annual report.

It’s the first year since the start of KiwiSaver that total fees have not risen – the combined effect of lower default fund fees, reductions in management fees by larger providers, some providers removing fixed membership fees altogether and others not earning the same level of performance fees.

Administration fees charged this year were the lowest ever, $17.3 million – a 65.7% fall from last year’s $50.3 million and down 81.2% from their peak in the year to March 2019.

John Horner, FMA director markets,investors and reporting, says it’s an important milestone as the FMA has been encouraging providers to share economic benefits of scale with members.

“Reducing fees is a meaningful way to do this because members retain more in their balances to benefit from compounding returns, but value for money is not just about fees. We will continue to work with supervisors to ensure managers demonstrate their value-add to members. The value-add should include investment and risk management competence which contributes to members’ balances, and advice which helps members make good decisions.”

The report says value for money means members should receive appropriate value for what they pay, and both value and price should be transparent.

“Fund managers can provide value for investors in many ways, including by spending on systems that reduce the risk of disruptions or pricing errors, by proactively offering investors meaningful on-going financial advice to improve their investment decisions, or by having investment processes that demonstrably add value. KiwiSaver providers have reviewed, and their respective supervisors have assessed value for money in recent months. It is part of the supervisor's role to report any concerns to us and we will respond as appropriate.”

FUM and returns
The total funds under management (FUM) was $93.7 billion – a 4.3% rise, year-on-year, and almost double 2018.
This year’s growth is largely thanks to the combined contributions of members, their employers and the Crown, worth $10.5 billion (down 6.7%). The cumulative impact of contributions significantly outweighs the cumulative impact of returns, highlighting the importance of regular contributions.

Conversely, net investment returns equated to a combined loss of $1.9 billion – a turnaround after last year’s $1.3 billion gain. The FMA puts this down to price decline in global equities and bonds through most of 2022. Total FUM with a conservative risk profile fell by 1% to just under $18 billion, after a 7% fall in members.

Conversely, balanced funds grew the most, by 6.3% to $28 billion, after a 7% gain in members.

Growth continued to be the biggest category at $40 billion (up 3.9%) and the most members (1.45 million). This was the first full year that default members were in funds with a balanced risk profile – resulting from the Government’s changes to the default settings implemented in December 2021. The value of default members’ savings was $2.7 billion as at 31 March 2023.

Changes between providers (including movements to different risk types) were 131,260, down 16.8% on 2021, and the lowest number since 2013.

Almost two thirds of the population has a KiwiSaver account with membership growing 2.7% on last year.

Withdrawals
Member contributions ($6.5b) fell 15% on the previous year mainly due to a 63% fall in lump sum payments. The number of members classed as non-contributing rose by 0.5% while  the number of members on savings suspensions is up 19.8%.

In total members withdrew $4.2b, up 11.7% with the largest category by value being members 65 and older who collectively withdrew more than $2.8b, up 46.3% year-on-year.
The report says this might have been due in part to higher term deposit rates on offer. The report said more than 170,000 over-65s remain KiwiSaver members and more are joining. The proportion of new over-65s has risen in the past three years from 1.44% in 2020 to 2.71% in 2022 according to Inland Revenue.
Hardship withdrawals were up 36.7% compared to 2022. They hit their highest level in the wake of COVID lockdowns but it is concerning to see them rising again, the report says. Conversely first home purchase withdrawals fell 35.6% to a level last seen in 2018-19.

Changing investment profile of KiwiSaver over time
Since 2020, the proportion of people in conservative funds has reduced from 35% to 21%. Those in balanced funds have increased from 21% to 30%, with members in the new default fund representing a third of those. Selection of growth funds has increased from 33% to 37% in the last three years.
Over a 10-year period there is a complete reversal of the earlier preference for conservative, over growth funds: relative to the 2013 KiwiSaver Report when 40% of investors were in conservative funds (including default funds) and 23% were in growth. In 2023 the proportions are 21% (noting default funds are now balanced) and 37%.

Parliament’s finance and expenditure committee has called for public submissions on the Employment Relations (Protection for Kiwisaver Members) Amendment Bill.

The private member’s bill, introduced last month by Labour backbencher Dr Tracey McLellan, aims to restore some financial protections originally given to KiwiSaver members by the Employment Relations Act 2000.

That was amended by the National government’s Employment Relations Amendment Act 2008, resulting in employers not being legally required to offer the same terms or benefits to KiwiSaver members as non-members.

Under current legislation, employers are not legally obliged to offer workers enrolled in KiwiSaver the same terms of employment, salary or wages, conditions of work, fringe benefits, or opportunities for training and promotion and transfer, as a worker not enrolled in the scheme. Employers can also offset pay increases against workers’ KiwiSaver contributions.

These settings could potentially disadvantage New Zealanders saving for their retirement, as they expose KiwiSaver members to potential discrimination due to their membership, meaning they may receive lesser protections than people who are not members of KiwiSaver.

The new bill aims to ensure workers can’t be discriminated against because they are members of a KiwiSaver scheme or a complying superannuation fund. It also aims to achieve more equal employment relations conditions for KiwiSaver members as those who do not belong to the scheme.

McLellan, who is MP for Banks Peninsula, says there are numerous examples of employees being offered, for example, $60,000 in wages but it turns out to include the employer contribution to KiwiSaver.

At its first reading in parliament, the bill enjoyed wide support on both sides of the house with109 ‘ayes’ and 10 ‘noes,’ all fromthe the Act party.

Earlier this year the Retirement Commission surveyed more than 300 small, medium, and large organisations about the use of a total remuneration approach to KiwiSaver and found that 45% use the model for at least some employees.

It found 25% of employers included employer KiwiSaver contributions as part of total remuneration. A further 20% adopted both approaches, paying some employees earnings plus KiwiSaver, and others earnings inclusive of KiwiSaver.

Retirement Commissioner Jane Wrightson said it was disappointing and not how KiwiSaver was designed to operate, “…as the legislation clearly states that compulsory contributions must be paid on top of gross salary or wages except to the extent that parties otherwise agree. However it is not prohibited as long as the outcome is the result of good faith bargaining.”

With the election roughly one month away if McLellan is not re-elected or doesn’t get through on the list, she is number 27, the bill may still survive if it is picked up by one of her colleagues.  Submissions close on October 30.

There should be more KiwiSaver investment in private equity as long as it’s done with the right capability and skill, says Pathfinder CEO John Berry.

“There’s a reason high net worth investors in large, long-term sophisticated endowment funds invest in private assets. Over the long term they pay higher returns than listed markets if managed and diversified properly.”

While Pathfinder and other boutique KiwiSaver firms such as Generate and Booster invest in private equity, not enough providers are, says Berry. And KiwiSaver members are missing out.

However managing a private equity inclusive fund “properly” comes at a higher cost.

Pathfinder charges 0.84% to 1.29% which among other things covers extra staff, including those who look at private deals, plus additional audit and compliance requirements.

Berry would like to see a refinement of fee reporting to break out underlying asset classes such as venture capital (VC), private equity (PE) and infrastructure.

“We've got this drive for transparency on fees but people don't understand what they're getting in return or what they're not getting. Knowing you’re buying everything in the market in a purely passive simple process for a low fee may be what a lot of people want. But they should be aware of missing out on the opportunity for private equity investment in a more active management style which can be more discerning around things like responsible and ethical investment.”

He says the most important factor is actual returns after fees with Morningstar tables not led by who has the lowest fee but who generates the best returns after fees. “It’s not the low fee providers.

“We need to reorient the conversation around what is important with some simple data points. Past returns and fees are obvious ones, current holdings is another but it's actually returns after fees, not the level of fees.”

Differing shades of active management

Pathfinder CFO Paul Brownsey says there are different levels of active management.

“We're not just active managers in an index fund. We're active managers in private equity, illiquid fixed income bonds and things like that. So we have a bigger opportunity set than an active manager who is deciding whether to buy more Microsoft or Alphabet”.

Berry cites Brownsey’s decision to swing into action when bond markets were wildly overpriced, putting Pathfinder’s fixed income exposure at zero. Another example was in Q1 2020 when Pathfinder’s KiwiSaver conservative fund gained 1.82% compared to an average decline of 2.44%.

“[The outbreak of Covid] was probably the most volatile time in the markets in a short period we’ve ever seen, even more than the GFC which happened over months.” says Brownsey.

“We didn’t have bonds, we had low weights to equities going into that period and took a lot of risk off the table but we put it back after the market bottomed.

“We didn't have any particular insight about it, we were just prepared to take an appropriate risk view on what was happening when the market sold off significantly and then when it came storming back with money chasing.”

He sees no impediments to any KiwiSaver providing having 1-2% in private equity providing they have sensible liquidity risk management.

“Managers could start thinking about clients’ best interests rather than trying to get rid of all risk, extra effort, costs to their business and maximising returns for shareholders.

“The largest [KiwiSaver] fund is now $20 billion; if they put 1% into private equity, that's a lot of investments. In venture capital right now people are writing cheques for $1m to $2m and in PE anything from $1m – $5m.”

Financial adviser role

He says financial advisers have an important role to help clients navigate KiwiSaver. “Don’t just look at fees, look at what you get for the fee and returns after fees. And think about exposure to assets other than conventional listed markets. I think that’s a really important value-add for financial advisers.”

Berry says the more sophisticated the product gets the greater the need for advice.

“If everyone on the market offered simple, standard passive low fee services there’s no room for advisers in KiwiSaver. But you've got around 35 providers and there's so much differentiation between them in terms of active, passive, ethical, private assets, no private assets, there's a real role there for advisers.”

BlackRock out but could come back in

Despite divesting its BlackRock shares, Brownsey hasn’t ruled out investing in BlackRock’s proposed NZ renewable energy fund announced with the government.

Pathfinder decided to ditch its very small global holdings (0.3 to 0.4) after the US mega manager put Aramco CEO Amin Nasser on its board.

But depending how BlackRock’s NZ energy transition fund eventuates, if at all, he would give it due consideration.

“It’s a decision to make at the time; does the good you're investing in stand alone as a positive investment? As advertised, it may well be a great thing, however, we've seen no detail.”