KiwiSaver

NZ Funds Management has become the first KiwiSaver manager to have its KiwiSaver scheme portfolios researched by a third-party research house, and has called on all KiwiSaver schemes to undergo a qualitative review.

Three portfolios in the NZ Funds KiwiSaver scheme earned recommendations from Australian research house Lonsec, with Income Strategy receiving a ‘Highly Recommended’ rating and ‘Recommended’ ratings for the Inflation Strategy and Growth Strategy.

“To have one of Australasia’s leading research organisations review our scheme’s portfolios is a significant achievement for us and is a credit to our KiwiSaver scheme investment management team,” said NZ Funds chief investment officer Michael Lang.

He also said he believed every KiwiSaver fund should be qualitatively reviewed.

“It should be compulsory for all KiwiSaver scheme portfolios to be qualitatively reviewed. The alternative, a quantitative review process, is based solely on numbers and does not take investment process into account so it is insufficient to determine whether a KiwiSaver scheme portfolio is likely to meet clients’ needs.”

Lonsec conducted a series of meetings with NZ Funds over an extended period, and in its report Lonsec said it observed “a strong investor focused culture, supplemented by extensive research, and a strong corporate governance and compliance regime.”

Its reports also noted NZ Funds management has “competitive advantages over its peers in people, process and product design.”

Lang said the reports are also designed to be used by advisers to assist them in helping clients choose the most appropriate KiwiSaver scheme for their needs.

“We are optimistic that in future having comprehensive qualitative research will become the minimum standard for managers and advisers offering or promoting KiwiSaver to the New Zealand public,” he said.

Commerce minister Simon Power has announced regulatory changes to make it easier for earthquake-affected Cantabrians to access their KiwiSaver cash.

“The Government was concerned that some people may have been unable to make an early withdrawal of their KiwiSaver contributions under the significant financial hardship rules of the KiwiSaver regime,” he said.

“So we have now approved changes to regulations, adding the earthquake to the list of circumstances that can be considered for an early withdrawal.”

Power said that under the approved changes to regulations, any resident of Canterbury at the time of the earthquake is entitled to refer to the destruction or damage of property as a result of the earthquake, loss of employment as a result of the earthquake and costs incurred as a result of the earthquake such as moving home when seeking an early withdrawal.

He said officials were working closely with KiwiSaver trustees to provide guidance on how to deal with earthquake-related hardship claims.

“Trustees will be advised to take a sensible and pragmatic approach to complications such as lack of access to financial records and uncertainty pending insurance claims,” Power said.

Total KiwiSaver membership rose 1.8% in March suggesting concerns about possible changes to incentives and an improving jobs market, according to default KiwiSaver provider Tower Investments.

“March saw a sharp lift in KiwiSaver sign-ups, with net total membership rising 1.8% for the month and closing on 1.7 million members,” said Tower Investments CEO Sam Stubbs.

He said opt-ins via employer were up 1% and automatic enrolments were up 2%, suggesting better employment conditions.

He also cited potential post-Budget changes to KiwiSaver as a driver for the increased membership.

“Another factor could be workers getting in on KiwiSaver before changes are made to the scheme as flagged by the Government for possible announcement in the upcoming Budget,” Stubbs said.

“People hesitating to join may have decided they should get in now just in case KiwiSaver is less generous to those who sign up later on.”

Stubbs said with the Government having flagging the May 19 Budget as being about savings and investments, changes to KiwiSaver incentives were possible.

“It’s possible – I don’t know if you’d call it probable – it’s certainly possible that they’ll be cutting benefits to some degree because those subsidies are quite expensive,” he said.

“Certainly it would seem that if the Government is calling this a savings and investments Budget then they clearly want the industry to grow and KiwiSaver to get even stronger and more viable. Maybe for that long term gain we might have to endure some short term pain in terms of the removal of subsidies or some subsidies.”

Stubbs said that as KiwiSaver membership had grown to include the majority of working New Zealanders, it was more important to focus on contributions rather than initial incentives.

“I think now the mechanisms for enrolling are so well entrenched that people are going to get signed up anyway, so I think the Government will – I hope – be more focused on the long term growth of the contributions in the scheme and making the existing members wealthier than focus solely on signing up new members.”

Stubbs said work could be done around tax credits – which he said are less understood by investors – and cautioned against the creation of a single default fund.

“The only thing we’d be hugely disappointed in is if they adopted the Savings Working Group’s idea of having a single low cost index fund, that would end up robbing a lot of New Zealanders of decent investment returns over the long term,” he said.

He said the current default providers had provided stable returns throughout the global financial crisis, and “I’d be surprised if the Government could run a single scheme at a lower cost that the private industry has been managing.”

 

Regulation for KiwiSaver schemes should place investors at the fore and not be led by product providers, and payments to advisers at the cost of investors should be disclosed, according to Morningstar.

In its submission to the Ministry of Economic Development (MED) Periodic Reporting Regulations for Retail KiwiSaver Schemes Discussion Paper Morningstar also said improved disclosure would encourage greater investment in managed funds.

“We believe that mandatory, periodic disclosure of comprehensive portfolio holdings would increase equity between managed fund investors and encourage greater engagement with retirement savings and pooled investment vehicles more generally,” the company said.

Morningstar also advocated full disclosure of any fees paid to financial advisers, however, “if the payment to advisers is being paid by the fund manager then the information is not so pertinent. Information about the sales practices of a scheme through an adviser channel would be interesting information, but it doesn’t help the end investor make a more informed decision.”

Morningstar also outlined its responses to  questions on a number of issues  raised by the MED paper.

It agreed that any costs deducted from a fund should be disclosed and that there should be a prescribed set of terms for each fee type.

On the issue of performance fees Morningstar agrees with the MED view that they should be disclosed, saying, “There is no rationale or justification for not disclosing performance fees,” it also advocates a wider disclosure regime.

“Simply disclosing the performance fee is not enough, though. Morningstar believes that the terms of the performance fee should be disclosed as well as the fee itself.”

The submission says fund managers should also disclose performance fee quantum, benchmark, hurdle, high watermark, reset period and crystallisation period.

Fuller disclosure of fees would create simplicity, uniformity and comparability and “show the investor the impact of the performance fee on their return, and provide at least a very good approximate basis for comparison.”

The submission also advocates mandatory full portfolio holdings disclosure, noting that despite fund management industry criticism, “Morningstar is yet to find a country where mandatory portfolio holdings disclosure has been harmful to capital market development.”

On wider regulation while Morningstar sees GIPS as the ‘gold standard’ for the calculation and presentation of performance figures, the company said it remains comfortable with the Investment Savings and Insurance Association’s approach.

“GIPS is by and large a strategy or asset class institutional approach to performance reporting not really appropriate to the New Zealand retail market.”