KiwiSaver

Passive investment and index funds are partly to blame for more KiwiSaver money being funnelled into businesses that harm the environment, animals or people, says Mindful Money CEO Barry Coates.

Of the $98 billion in KiwiSaver, $8.6 billion (8.9%) is invested in unethical stocks, according to new analysis from Mindful Money. This has risen from 7.2% in 2019 when Mindful Money began collecting the data.

Coates says while the surge in fossil fuel prices caused by Russia’s war against Ukraine has seen KiwiSaver money pour into those stocks, passive investment and greater use of external index funds was also responsible. In particular, many passive funds invested in oil and gas companies expanding fossil fuel exploration and production.

Mindful Money divided fossil fuel companies into those transitioning to renewables, those expanding and those doing nothing. Investment in companies transitioning to renewable energy was flat and hasn’t increased as a percentage of KiwiSaver.

“One of the biggest investments in this area is Contact Energy but for other companies on a renewable pathway it is not big. Meanwhile, investment in companies that are expanding – Exxon, Chevron, BP and Shell –  is now $3.2 billion having more than doubled over the eighteen months to March 2023.”

Coates says many funds claim that stewardship and shareholder voting power will encourage companies to change, but over time this approach has been shown to lack credibility.

“There are still only a few fund managers who can show significant results from their engagement activity, and few have a credible pathway to sell their shares if harmful impacts continue.”

He acknowledges that putting more work into screening and engagement might be cause for higher fees.

“There are funds that have good processes to avoid the companies that members of the public are really concerned about. They have to work, and some managers actually are active managers globally.

“I think there's been kind of almost a glorification of low fees but the drive for lower fees is a drive for lower value. That being said, to run now, some index funds that do exclude a lot more than they used to.”

However the issue is not just about active versus passive management, says Coates.

“What kind of passive are we talking about? Are we talking about passive with very few overlays on ethical grounds or the funds that are strongly oriented towards responsible and ethical investment.

“There are now some index providers that provide stronger exclusions; fund managers should be looking at them. For example Beta Shares are passive funds and have a very strong overlay to exclude companies that are problematic.”

Animal harm and human harm

While fossil fuels companies accounted for more than $3 billion of KiwiSaver, $2 billion is invested in those that test products on animals for reasons other than human health.

Meanwhile companies which have or are breaching human rights, including labour rights, trafficking and violence against civilians, are the third biggest recipients. MIndful Money says a total of $1.4 billion is invested in companies such as Meta (digital harm and breaches of privacy), mining company Rio Tinto (environmental and community harm) and Johnson & Johnson which Sustainalytics rates as having a high level of controversy for quality and safety of several products across all three of its business segments — drugs, devices, and consumer products.

Just over $1 billion of KiwiSaver money is invested in companies that cause social harm, including alcohol companies such as Diageo, pornography, gambling and tobacco.

“It is now eight years since there was a public outcry over the amount of KiwiSaver funds in tobacco. The latest data shows an annual growth of 50% in investments in tobacco companies such as Philip Morris, British American Tobacco and Imperial Brands, to more than $21 million.”

Another $292 million is invested in weapons companies, including nuclear weapons producers, such as BAE and Lockheed Martin, and handgun producers and retailers, says the report.

Coates wants more transparency in KiwiSaver schemes. “Few KiwiSaver providers reveal the full list of companies they invest in and none identify the companies that are likely to be of concern to the public. Many people using the Mindful Money website are shocked to find out what companies they are invested in.”

He says the investment sector appears to be an outlier. “Retailers of most consumer products are acutely aware of their customers’ concerns.”

Earlier this year the annual Mindful Money and the Responsible Investment Association of Australasia consumer survey found 74% New Zealanders expect their money to be managed ethically and responsibly.

“The issue for financial advisers and fund managers is who’s going to listen to the clients? There is evidence that clients don’t always raise it proactively in meetings with their advisers but if and when it is raised they have very strong views. It’s an age of climate change and investment has a huge role to play but somehow advisers and fund managers are carrying on as if there is no link.”

National MP Andrew Bayly does not think allowing New Zealanders to split their KiwiSaver savings over multiple providers would be too tricky to administer.

Instead it would provide consumer choice and provide a source of funding for infrastructure development among other things, he says, of the new policy, which would allow KiwiSaver members to split contributions across up to three schemes.

But providers aren’t convinced and wonder whether such a change would add too much extra administration cost to members and the system as a whole.

Simplicity CEO Sam Stubbs says the devil will be in the details.

“If it lowers fees via competition – great. But if it’s an excuse to increase fees because of complexity, not great. So hard to know at this stage but more choice is desirable.”

Ruper Carlyon, founder and CEO of another boutique KiwiSaver provider Koura Wealth says it’s an interesting proposal.

“It would be a good thing for us because people might be more willing to diversify towards smaller players in the market with some of their KiwiSaver. If it builds trust and further develops the product, it’s a step forward.”

But he has reservations around complexity, how it would work and whether it would require a rebuild of systems at the Government end.

“The big difference between New Zealand and international markets is that we have the IRD as the central repository for all things KiwiSaver. And so when you sign up to a new provider, what would you do? Do you say you want your balance transferred,  you don't want your balance transferred or  you want X per cent transferred. Or for first-home withdrawal where would employee and employer contributions go?”

Kernel Wealth CEO Dean Anderson says one of New Zealand’s strengths is the simplicity of our systems – from a simple tax regime to a simple KiwiSaver structure administered centrally through IRD.

Both Carlyon and Anderson refer to the UK and Australia which are now dealing with the problem of investors having pockets of superannuation scattered across the market place.

“Often balances get forgotten, or aren’t regularly reviewed and you tend to see self-managed results are worse than simply getting the asset mix right and keeping costs low,” says Anderson.

Carlyon says over the past five to 10 years, both countries are going through a massive effort to consolidate pension schemes.

Both question how greater administrative complexity would result in lower fees. The upshot for Anderson is that he is indifferent to the policy, as 95% of the market will see little value and it might even add more confusion. He is skeptical on whether it will foster higher innovation, greater innovation or lower fees.

Likewise Mike Heath, general manager of InvestNow which already allows members to spread their KiwiSaver across a choice of 40 funds from 15 providers.

He says while he applauds National for identifying a long-known issue with the KiwiSaver system, much of the complexity, expense and risk would fall on the IRD. Members of more than one scheme would also lose the benefit of consolidated KiwiSaver reporting where all costs and investment returns can be viewed in context.

“The National Party emphasis on ‘flexibility and choice’ in KiwiSaver is on the money,” he says. “But the proposed policy is more likely to introduce confusion and expense when cost-effective solutions already exist.”

Sophisticated investors

Bayly, who is National’s Commerce and Consumer Affairs spokesperson, doesn't think the policy would require major changes to IRD systems. “What we’re thinking at this stage is that you would go to your employer and say you want to split your contributions and they feed it through to the IRD.

“The idea of the IRD’s new BTP [business transformation programme] is that it has full visibility around everything. They’ve now got the systems to do it. There might be some administration costs, but we don't think it's substantial and we can work through in absolute detail with them.”

He says National would probably put restrictions on the proposal. “We wouldn’t want people with a balance of $15,000 spreading their KiwiSaver unnecessarily. Obviously it’s directed at sophisticated people with larger balances and we’re talking for the next five to 10 years. “

As well as InvestNow, Kiwis can also self-select KiwiSaver funds from Consilium and Craigs Investment Partners, while Sharesies announced in May that it will allow members of its forthcoming KiwiSaver scheme to choose between six base funds.

“That’s a market solution to the existing situation,” says Bayly, “and that’s great. But people may want to choose their own options. We are going to do as much as we can to encourage KiwiSaver investors and fund managers to participate in alternative forms of investment such as expansion capital, VC, infrastructure. As balances grow people can make the choice for themselves.

Funding new infrastructure

“If you’ve got several hundred thousand, you might want to target your money in certain areas. You might have a social conscience or want to get into infrastructure.”

Bayly says only a few KiwiSaver providers have built the expertise to do alternative investments.

“Many of the larger ones for instance, like the banks, are basically passive managers. And then you’ve got the likes of say Booster, which extensively invests in wine, Sam Stubbs into housing, and Milford which has built an M&A team. So some of them have taken on the capability to do it.”

He says National wants to get third party providers involved in infrastructure and what better investors than KiwiSaver providers with their long term view.

A general review?

Sharesie’s joint founder and CEO Leighton Roberts says, “Giving more choice and control leads to a greater connection, which is what investors have told us they want, and is reflected in our self-select Kiwisaver scheme to be rolled out  in coming months.

“What National is proposing will benefit some investors, but to drive better outcomes for the significant portion of people who are really concerned about having enough money to retire in comfort, there are other policy changes to consider.

“For a step change, why not do a proper policy review of Kiwisaver that considers access, contributions, tax incentives, and compulsion.”

In a similar vein Anderson says he would rather see an ambitious policy announcement on growing KiwiSaver engagement, enhancing financial literacy in schools and tackling the key issue of raising savings rates overall.

On the topic of a general review Bayly says, KiwiSaver is so important to the fabric of New Zealand now, and we need to make it even more successful. “So, I think there'll be other elements we'll look at in time.

“We’ve already made a couple of announcements on KiwiSaver so this shouldn’t be read as the only thing we will do.”

Last month National said it would allow tertiary students to access the scheme to pay for tenancy bonds.

Bayly wouldn’t say whether there will be any more KiwiSaver announcements coming out before the election.

The National Party says if it is elected it will allow KiwiSaver members to split their savings amongst multiple providers.

National has proposed allowing KiwiSaver members to split their savings between multiple schemes.

National’s Commerce and Consumer Affairs spokesperson Andrew Bayly says the move will drive innovation, boost competition and putting downward pressure on fees.

“The money in every KiwiSaver account belongs to the person who saved it – but the current rules mean Kiwis have to have all their KiwiSaver savings with just one provider.

“That restriction is limiting investment choices, and potential returns, for savers.

“As the sector grows and matures, some KiwiSaver providers are looking to diversify their investments into different classes of assets – such as start-ups and Build-to-Rent investments. However, under the current settings, savers who want to access these new investments are forced to shift all their savings to that provider – limiting choice and competition.

“KiwiSaver plays an increasingly important role in the New Zealand investment environment, as generations of savers continue to accumulate assets. But restrictions on savers and fund managers are pushing up fees and limiting investment opportunities.

“Increasing flexibility and choice for KiwiSavers to allocate their savings across multiple providers will encourage innovation, and higher potential returns over their lifetime.

“That’s why National will give KiwiSavers the flexibility to split their savings across multiple providers to provide more choice, improve investment options and competition. Improving competition is the best way to put downward pressure on KiwiSaver fees.

National also plans to roll back the Credit Contracts and Consumer Finance Act (CCCFA) and it will repeal the recent Conduct of Financial Institutions Act (CoFI).

It says CCCFA imposes additional burdens on lenders, making credit more expensive and harder to obtain, even for basic services such as overdrafts and mortgages.

[MORE TO COME]

The Startup Advisors Council wants the Government to remove barriers impeding KiwiSavers from investing in local startups.

The recommendation is one of 25 in the council’s UpStarts 2023 report, which was commissioned by the Government to find ways to boost the sector.

Reserve Bank data shows that of the total $97b held in KiwiSaver funds at March this year, 0.18% was invested in unlisted shares.

This compares to the US where a 2022 endowments study found long-term endowment managers typically allocate 30% of funds to private equity and venture capital, and 28% allocations to public equities.

Research by international consultancy Startup Genome found New Zealand has around 2,400 startups with 58% in Auckland, 15% in Wellington, and 8% in Christchurch. The research suggests the ideal number per million people is around 1,000.

The report says New Zealand currently invests $400m a year in startups. It wants to double the number of startups over the next seven years and which it estimates will take another $2b in new funding sources and then sustained investment of $800m+ per annum after that.

The report says, “This gap suggests that New Zealanders are being deprived access to a significant growth asset class.”

It identified three main barriers to KiwiSaver providers investing in PE investment.

The first is the requirement for daily liquidity to allow KiwiSaver members to switch funds at any time, requiring managers.

Then the requirement for daily valuation. The report says to support daily liquidity means KiwiSaver managers need to be able to mark illiquid assets to market regularly. “Those managers who are investing in the sector have developed the capability to do this between the quarterly reporting cycle of the venture fund managers, but others have not.”

The third is regulatory focus on low fees is another barrier as investing in venture funds or directly into private equity increases overall fees and creates a short-term drag on returns .

The Council also said it had observed that the level of understanding of how venture capital and private equity worked – the drawdown profile, risk/return profile, the J-curve effect – was “surprisingly” immature.

“Our view is that New Zealanders should all be able to access the dynamic, high-growth investment opportunity that investment in UpStarts represents, and that these ‘blockers’ should be removed to enable capital the opportunity to flow.”

The report proposes four measures to reduce the barriers. It asks the Government to guarantee the short-term liquidity of any investments in an eligible New Zealand venture fund.

“So if a member withdraws, transfers, or triggers a fund to move outside its internal approved allocations to the venture class, the Government would stand-in as a buyer and subsequently seek to sell that interest to another fund. This would eliminate liquidity as a barrier to investment in venture funds.”

It also asks the Government to consider moving from daily liquidity to 90-day liquidity to reduce potential short-term switching volatility and provide more operating certainty for KiwiSaver funds invested in illiquid assets.

“90-day liquidity would be more consistent with how the wider savings industry operates globally.”

On fees, the Council proposes that the fee reporting regime be refined to break out the underlying asset classes that KiwiSaver managers are investing in.

“The reporting could be done in a way that celebrates investments in New Zealand illiquid assets – infrastructure, private equity, venture capital – that help grow New Zealand.

Finally it asks the government to provide guidance on asset allocation as is done by the Australian Prudential Regulatory Authority (APRA).

“Providing similar guidance to the New Zealand KiwiSaver industry will help build confidence in allocating capital to illiquid assets.”

Speaking at a conference where the report was released, Minister of Research, Science and Innovation Ayesha Verrall said the Government would take time to “carefully consider” the recommendations. Meanwhile Act said of the 25 recommendations, removing KiwiSaver barriers was the only one it would support. While National finance spokesman Andrew Bayly has already said he would look at removing KiwiSaver barriers.

The Startup Advisors Council was set up last year by Verrall. Movac founder Phil McCaw is the Chair, and the Deputy Chair is Suse Reynolds who also chairs the Angel Investors Association. Other members are Marian Straker, founder of the Ministry of Awesome; Grant Straker, founder of AI translation platform Straker Translations; Mike Carden, founder of Sonar 6; Imche Veiga, CEO of Outset Ventures; and Carl Jones, managing partner of WNT Ventures.