KiwiSaver

KiwiSaver should be made compulsory and contribution rates should be increased, the scheme’s founder Sir Michael Cullen told a conference yesterday.

The former Finance Minister has also mooted making annuities compulsory or implementing a one-off tax on KiwiSaver schemes at maturity to help reduce future New Zealand Superannuation costs.
Under Sir Michael’s plan, KiwiSaver would become compulsory in 2016 with minimum contribution rates of 4% for employees and 4% for employers, not far below Australia’s compulsory super rate of 9%, soon to be raised to 12%.  “With the number of KiwiSavers already far higher than forecast it is not a long step to make the scheme compulsory, tighten some of the criteria, and, over time, gear it up to a level far closer to that planned in Australia,” he said.

“At that point the relationship between KiwiSaver and New Zealand becomes one for serious discussion.” Sir Michael said KiwiSaver in its current form may boost retirement incomes but does nothing to reduce the cost to taxpayers of NZ Super. He explored two options to reduce this cost: in one scenario KiwiSaver members would be required to use half of their accumulated savings to purchase an annuity, with the state topping up those who had a retirement income lower than the current superannuation formula.

This would reduce the cost of NZ Super to under 2% of GDP by 2050 and next to nothing by the end of the century, he said. The second option, which had “significant advantages in terms of simplicity and fairness”, would be to raise the age of NZ Super eligibility to 67 and put a “withdrawal” tax of 10% or 15% on KiwiSaver that would apply at maturity or when people permanently emigrated.

Sir Michael said this option would reduce the cost of NZ Super by about 5% of GDP, would be administratively much simpler than the first option and would avoid the difficulties of income testing, although any changes in the area would be “fraught”. He also suggested transferring state asset shares into a holding company owned by the New Zealand Superannuation Fund, which he also set up during his time as Finance Minister.  

Prime Minister John Key has promised to resign before making any changes to NZ Super eligibility.

Managed funds with a “life-cycle” component won’t take the place of financial advisers but are the next best option for the large number of people who don’t use advice, an expert says.

A review is underway into the KiwiSaver default scheme system and Mercer, one of thedefault providers, is pushing for a life-cycle component linking asset allocation to age to be included in these funds.

A similar call has been made by fellow default provider ANZ, which has estimated such a change could boost lifetime returns for the average default scheme member by $72,000.

Graeme Mather, leader of Mercer’s defined contribution client unit, Australia and New Zealand, said life-cycle funds are becoming increasingly sophisticated and are based on many of the principles advisers use when determining asset allocation for clients.

He said advisers should see these products as an opportunity rather than a threat.

“One of the key issues is: are we doing the financial planners’ job for them?  Do I think the financial planning industry is going to disappear because of this?  No,” he said.

However, he said international evidence shows that many investors in superannuation schemes don’t seek financial advice and remain stuck in default funds that often don’t match their investment profile; life-cycle funds would help these investors, he said.

“I don’t believe it’s good putting a 20-year-old and a 70-year-old in the same fund; they have different risk profiles,” he said.

The government’s discussion document said that “in an ideal world”all investors would be fully informed and sufficiently knowledgeable to make an active choice of superannuation scheme provider and fund.

“The reality is very different,” it said. “Decisions around investing are hard. The subject matter is complex and requires a level of research, time and commitment that is beyond many people.

“And while a large and active market of financial intermediaries does exist, anecdotal evidence suggests the account value threshold often set by advisers before offering advice serves to exclude many KiwiSaver members with small balances.”

Competition between KiwiSaver providers is intensifying as the growth in new members slows, a new analysis by the Financial Markets Authority suggests.

The FMA’s annual KiwiSaver report, which covered 50 schemes, showed that in the year to March nearly $750 million was transferred between schemes, including just under $50 million transferred out of default funds.

Overall the scheme’s funds under management (FUM) exceeded $12.73 billion as at March 31, an increase of $3.56 billion in the past year
The largest contribution to the increase in FUM was member contributions of $1.33 billion, closely followed by Crown contributions/fee subsidies of $1.06 billion, and employer contributions of $865.7 million.

Income from investment of scheme assets represented $449.9 million, or 9.7% of the total income for the annual return year.

As at March 31 there 1.91 million members of KiwiSaver schemes, a 14% increase on the previous year.

FMA chief executive Sean Hughes said the number of KiwiSaver members has since exceeded two million, and people need to take a long term approach to their investment.

“Our desire is for members to make decisions based on their life stage, age and personal circumstances which will leave them in the best financial position when they reach NZ Super age,” Mr Hughes said.

“The type of KiwiSaver portfolio for someone in their 20s will be different from someone in their late 40s. It’s never a bad time to reassess your investment options in consultation with your KiwiSaver provider and your financial adviser.”

The report found that the largest item of expenditure over the year was fees, amounting to a total of $129.0 million across all schemes.  Investment management fees made up the bulk of this figure ($69.2 million), followed by administration fees ($56.6 million) and trustee fees ($3.2 million).

The second largest item was taxation ($90.2 million), while other scheme expenses accounted for $8.44 million.

During the year $28.9 million was withdrawn due to financial hardship, which FMA said reflected the weaker economic climate following the Global Financial Crisis (GFC), and also the effect of the Christchurch earthquakes.

Almost double that amount ($57.2 million) was withdrawn for first home purchase, showing the popularity of that feature of KiwiSaver.

The report also noted that over the next five years, it is estimated that 155,000 KiwiSavers will reach retirement, and approximately $2.3 billion in assets could be unlocked from KiwiSaver schemes.

The Financial Markets Authority (FMA) has released its final guidance on the sale and distribution of KiwiSaver, confirming the circumstances in which registered financial advisers (RFAs) can continue to sell the scheme.

Sue Brown, the FMA head of primary regulatory operations, acknowledged there had been concern within the financial services industry about the extent to which KiwiSaver services could be provided by advisers who were not authorised or part of a Qualifying Financial Entity (QFE).

“FMA’s position is that there are limited circumstances in which a person selling a particular KiwiSaver scheme to a client will not be considered to have provided an advice service,” she said.

“There is broader scope to provide class advice, given the incentives available to join KiwiSaver and the investment options available within KiwiSaver schemes.”

The FMA guidance note outlines what it deems class advice, personalised advice and no-advice, and who can offer each.

The guidance described class advice as generic to a group the investor belongs to, though not tailored to their specific circumstances, and says it may be provided by RFAs.

The move to allow RFAs to give limited KiwiSaver advice had been backed by both the Institute of Financial Advisers (IFA) and the Professional Advisers Association (PAA), both of which made submissions to the FMA on the draft guidance note.

“Perhaps the best outcome is that the document makes it clear that RFAs can sell KiwiSaver in tightly controlled circumstances, by setting the framework for RFAs in particular to continue to sell KiwiSaver with confidence,” said the IFA.

Brown said she expected KiwiSaver providers “to consider the implications of this guidance note and make appropriate changes as soon as possible.”

“We expect these to be in place by March 1, 2013.”