KiwiSaver

Market bubbles caused by low interest rates could see speculative KiwiSaver schemes set up to lure unwary investors, Tower Investments chief executive Sam Stubbs warns.

At the Tower Investments quarterly media briefing today, Stubbs said governments were engaging in “financial repression” by keeping interest rates artificially low.

While this tactic gave the governments more “headroom” to try and sort out their shaky finances, it punished savers and risked creating high levels of inflation, he said.

Asked by Good Returns whether there was also a risk of creating market bubbles such as the tech bubble and the more recent housing bubble, Stubbs said that was a definite possibility if interest rates were kept too low for too long.

“Artificially low interest rates create distortions in the investment market,” he said.

“I’m worried that a KiwiSaver fund gets set up to take advantage of this – most people think KiwiSaver is a government-guaranteed scheme.”

Stubbs said the Financial Markets Authority would need to be vigilant to ensure KiwiSavers weren’t being taken for a ride by shady operators investing in bubble activities.

“From a New Zealand investment point of view you need to be wary of what your KiwiSaver fund is investing in.”

Stubbs also said the debate over whether to make KiwiSaver compulsory was “almost settled” with polls suggesting most New Zealanders thought compulsion was a good idea: “the big issue is the contribution rates.”

He said contribution rates of 2% or 4% wouldn’t be enough, pointing to Australia where the rate is 9% and will eventually rise to 12%.

However, an increase to that level would need to be phased in over time to allow people to adjust, particularly those on low incomes who would struggle with 9% or 12% of their pay coming out.

“If contribution rates were to increase by 0.5% or 1% every year for 10 years it would give people and employers time to get ready and it would create a very positive environment for New Zealand – we would go from a capital poor to a capital rich country.”

The best superannuation programme in the world was a three-hour flight across the Tasman, he said.

“Australia is a very capital rich country… if you want to raise money you can raise that money domestically.”

Term deposits and rental property remain the investment of choice for the majority of Kiwi’s, while Budget changes have dented KiwiSaver’s popularity, according to the latest ASB Investor Confidence Survey.

kiwiSaver fell from 12% to 9% as the investment offering the best return, ranked behind term deposits, rental property and bank savings.

“The changes to KiwiSaver announced in Budget 2011 appear to have shifted investor perceptions of KiwiSaver,” said ASB head of private banking and wealth management, Jonathan Beale.

“The swing in attitude can also be seen in the 6% drop in the number of people that think KiwiSaver will encourage New Zealanders to save for their retirement, from 75% to 69%.”

However, the survey also found out of those using or intending to use KiwiSaver, a record 63% said it would be their main source of retirement provision, a percentage which has been slowly rising over the past year.

“For this reason we see the drop in KiwiSaver popularity as a downward blip in the short term.”

Beale said it remained to be seen whether this ‘blip’ developed into a longer term trend, “but our feeling is that the success of KiwiSaver will see it pick up in popularity again in future.”

The survey found an even split between investors expecting better or worse investment returns.

A total of 21% of investors felt term deposits offered the best value of all investment types, up two points from last quarter. Rental property climbed one point to 16%, followed by bank savings, steady at 12%.

Beale said the results indicated investors are incorporating their desire for security into their assessment of best returns, “and are still turning to term deposits and rental properties over other investments.”

One of Fidelity Life’s KiwiSaver funds is being buffeted by the same global financial forces which forced the liquidation of the $75 million NZDX-listed Fidelity Capital Guaranteed bonds last week.

Fidelity’s options KiwiSaver fund uses the same strategy which includes writing put and call options on New Zealand, Australian and US government bonds.

 

Its unit price dropped to $3.8045 on August 9, the latest price available, from $4.1331 a day earlier and $4.8859 on July 29. That’s a 22.1% drop since July 29.

By contrast, over the same period, Fidelity’s aggressive KiwiSaver fund has seen its unit price fall 11.4% from $2.8057 to $2.4859 while its conservative fund has eased just $2.3% from $5.9572 to $5.8227.

The options KiwiSaver fund has been a strong performer. In the year ended July, its unit price rose 20.9% and it is 39.8% higher than at the end of July 2008.

Fidelity’s aggressive fund’s unit price rose 5.8% in the year ended July but is only 2.6% higher than in July 2008 while the conservative fund’s unit price fell 3% in the year ended July but is 8.5% higher than at the end of July 2008.

Fidelity chief executive Milton Jennings says while the KiwiSaver fund is following the same strategy as the bonds, it’s structured differently from the bonds and isn’t forced to start closing out contracts as the bonds did when they approached their floor set by a complicated formula.

That means the KiwiSaver fund can hang on in the hope of recovering when financial markets stabilise.

“When you write options and you get this extreme volatility that we’ve seen in the last couple of weeks, the premium you get escalates the income you earn from writing options – it’s probably three or four times you would have got prior to this volatility occurring,” Jennings says.

Nevertheless, “we would prefer not to have it (the volatility).”

Jennings says he expects it will take a few months for the options fund to recover. “Equity markets tend to take even longer to recover some of their losses.”

Bondholders will receive no more interest although they will get their capital back in mid-2013 because they are capital guaranteed by Westpac Bank.

Prime Minister John Key has signalled the Government is considering further changes to KiwiSaver that could see everyone in employment auto-enrolled into the savings scheme.

Key said auto-enrolment would be an option included in a discussion paper to be made public in the next few weeks and that the Government was asking IRD and the Treasury to advise on how auto enrolment might work.

At present the scheme has 1.7 million members while another million people in work have yet to join.

Officials estimate the cost of bringing the additional savers into the scheme, each with the $1,000 ‘kickstart’, would be around $1 billion, though it is also likely the opt-out rate would be higher.

That view was echoed by Workplace Savings New Zealand chairman David Ireland, who told TV One’s Breakfast programme many would opt out.

“They will decide it’s not for them and carry on doing nothing or making alternative provision,” he said.

Default KiwiSaver manager Tower Investment’s chief executive Sam Stubbs told Radio New Zealand he believed it was inevitable KiwiSaver would be made compulsory for those in employment.

However, Labour leader Phil Goff expressed concerns about extending the scheme to people who may not have the spare money to put into savings.