KiwiSaver

Plans to suspend contributions to the New Zealand Superannuation Fund until 2021, announced in today’s Budget, are a short-term action and could bring long-term pain, according to consulting, outsourcing and investments firm, Mercer.

Mercer’s New Zealand Business Leader, Martin Lewington, said, “While we recognise the Government is under significant budgetary strain, like many countries around the world, we’re concerned suspending contributions to the Fund – even on a temporary basis – may put future Governments and generations under significant pressure to change NZ Super.

“Reducing funding now without any other significant reform around retirement saving policy, such as increasing the NZ Super entitlement age or providing alternative retirement savings mechanisms, will only add to the financial pressure on the Fund in the future,” he said.

The Fund has been set up as a mechanism to pre fund or provision for a portion of the NZ Super costs of New Zealand’s ageing population. Contributions were planned for investment over a very long time frame, over which returns on risky assets were expected to exceed returns on New Zealand Government debt (being the cost to the Government of borrowing to fund its NZ Super obligations).  Government contributions were previously running at $2.4 billion annually.  The New Zealand Government could have used the contributions to clear its debts, but decided to contribute to the Super Fund of which capital is expected to be drawn down commencing 2031.

“Suspending contributions to the fund in the short-term obviously means less future accumulation.  This may well lead to future Governments needing to make larger contributions to recover this suspension or ultimately bear higher NZ Super costs due to the shortfall in draw-downs from the Fund,” said Lewington.

“The Government could save money through the contributions’ suspension if its debt funding costs exceed the return on the Fund’s assets. We believe this is unlikely over the next 20-30 years but is possible over shorter timeframes, as has been the case recently.

“As such the suspension is not only likely to increase future contribution requirements due to lost investment earnings, but also to raise the risk of inadequate returns on catch-up contributions due to the shorter investment timeframe,” he said.

“NZ Super represents a known fixed cost, which the Government will have to meet in future years. While the Government has produced a budget with a $3 billion increase in core spending in a number of areas to stimulate the economy, which we support in principle, we do not believe this should be to the detriment of the NZ Super Fund.  The long term risks cannot be ignored and the potential consequences of suspended funding are significant if no other action is taken.

“We agree with the Government that the current recession will pass, but our population – and our workforce – will continue to age and the long term risks of this cannot be ignored. The potential consequences of reduced funding to NZ Super Fund could be significant at a national and individual level,” Lewington said.

Apart form the suspension of contributions to the NZ Super Fund, the Government has not formalised any policy around asset allocation within the NZ Super Fund, however it has indicated they would like 40 per cent of its assets invested in New Zealand.

Mercer does a lot of work globally with sovereign wealth funds such as the New Zealand Super Fund, many of which exist for the purpose of providing public pensions where countries have ageing populations and  Lewington noted there are risks and benefits in mandating these funds to invest domestically.

“Overall, we believe our ageing population and the budget strain these demographic changes bring are some of the biggest challenges our current, and future, governments face.  We encourage the Government, and business, to look at a more holistic approach to these challenges specifically with the aim being to secure an adequate retirement income for all New Zealanders, which may involve multiple solutions that could increase private provisioning for retirement.

 

Members of the Mercer Super Trust KiwiSaver scheme can now choose to invest in the AMP Capital Responsible Investment Leaders Balanced Fund, with Mercer adding the RI investment option in response to growing demand.

Martin Lewington, Head of Mercer in New Zealand said Mercer made the move to add the RI option to its investment platform in response to feedback from its members.

“We conducted a survey of members late in 2008 which revealed that 81 per cent considered it important to have a responsible investment option.

“In New Zealand responsible investing has been on the radar for some time, but in the wake of the global financial crisis many are taking greater reassurance in the knowledge that the environmental, social and governance factors, which may impact positively upon long-term returns, have been considered,” he said.

Lewington said Mercer joins a pool of very few KiwiSaver schemes to offer a balanced investment option that also takes into account social and environmental investment factors.

“Mercer thought it important to offer members a balanced investment option, which has a medium risk profile, for their Responsible Investment option, given the large appetite for more conservative investment options in the current environment.”

Lewington said Mercer decided to partner with AMP Capital Investors to provide a Responsible Investment option in order to provide a cost-effective option for members, provided by a leader in Responsible Investment.

“Mercer and AMP Capital Investors are both leaders in the Responsible Investment field and working together is a natural fit. AMP Capital Investors has assembled a very experienced team of responsible investment practitioners to join their Responsible Investment committee, including a Mercer representative, to oversee the investments and we have confidence that they can deliver strong investment performance over the long term,” said Lewington.

“Members will also benefit from investment management fees which are comparably cheaper than what many of our competitors are offering for their Responsible Investment funds,” he said.

He added that Mercer was the first investment consultant to establish a specialist global Responsible Investment business unit and played a major role in developing the United Nation’s Principles for Responsible Investment.

Mercer also provides various investment managers, such as AMP Capital Investors, with research tools and advice to assess the environmental, governance and social factors within investment portfolios.

The AMP Capital Responsible Investment Leaders Balanced Fund will invest in funds or through investment managers who can demonstrate they have a system for taking Responsible Investment into account. It will also exclude investments in companies with significant involvement in the product or manufacture of activities with a high negative social impact.

 

In the first significant KiwiSaver consolidation since the superannuation scheme began, IRIS and Gareth Morgan KiwiSaver have announced they are teaming up to provide the IRIS-GMK scheme.

IRIS, the trade union associated KiwiSaver provider, announced today that it is consolidating with Gareth Morgan KiwiSaver to deliver union members and their families access to an established and well-performing KiwiSaver scheme.

Gareth Morgan KiwiSaver Director Gareth Morgan says GMK is excited about reaching an agreement with IRIS.

“This is a great opportunity to put a version of the Gareth Morgan KiwiSaver Scheme in front of union members and their immediate families.”

National Distribution Union national secretary, Laila Harre, says the move will advantage union members who are saving for their retirement.

“With this consolidation our members have the opportunity to access a large KiwiSaver scheme while being secure in the knowledge that it is a New Zealand business that is run on principles that align with those of IRIS.

Engineering, Printing and Manufacturing Union national secretary, Andrew Little, agrees.

“GMK was chosen by IRIS for this consolidation because it was consistent with the objectives of the original IRIS product which were personal service for members, a simple fee structure and no commissioned sales.”

IRIS-GMK will be the branded version of the Gareth Morgan KiwiSaver Scheme, and unions and the GMK team will work together in marketing IRIS-GMK to union members and their immediate families.

Existing IRIS KiwiSaver members are being notified of the changes and will be invited to transfer to IRIS-GMK.

Nearly half of private investors have now joined KiwiSaver with a further 22% intending to join in the next quarter, a survey from ING says.

Well over half of private New Zealand investors will be KiwiSavers by June, according to results from the recent ING Investor Dashboard Sentiment survey. As of March, 49% of high net worth New Zealand investors had joined, and a further 22% said they intended to join.

This figure is up from 15% who indicated they intended to join last quarter. This popularity of KiwiSaver is consistent with a FundSource report released yesterday, showing that KiwiSaver net funds under management, which reached $2.27 billion in March 2009, now represent about 15% of the total FundSource reported retail net funds under management, currently standing at $15.31 billion.

ING head of KiwiSaver distribution, David Boyle says, “The changes to the scheme introduced by the government this month will potentially encourage more people to join, even during the economic downturn. Since people are now feeling less willing to spend and more willing to start saving. Lowering the minimum contribution rate to 2% may well regenerate interest from those who previously saw the 4% contribution level as a barrier�.

However, FundSource also reported that the majority of people enrolled in KiwiSaver have their contributions allocated to conservative funds, purely because most people are in default schemes which automatically select conservative funds.

The ING KiwiSaver (default scheme) numbers are consistent with this, with 96% of investors in the conservative fund.

“Conservative funds may well be the best option for the older KiwiSaver and for the naturally cautious investor, especially during times of market turmoil. However, over the average duration of lifetime savings of 20 years, conservative funds have not historically delivered the best returns available. Ultimately, conservative funds may not provide the level of savings people would require to live well in retirement,â€? Boyle says.

“In the case of KiwiSaver, the investment remains locked in until members reach superannuation age of 65, so for those people at the beginning or in the middle of their working life there is a long way to go before they reach retirement. Unfortunately, if an investor selects a growth fund early and does not change this later, then if there is a large downward price movement and the investor is closer to retirement, the losses have a greater impact. This is exactly why ING includes the Lifetimes option for KiwiSavers so that as you move closer to retirement your contributions are allocated into more conservative and cash preservation funds.�

The Lifetimes Option places investors in a fund according to their age, and then moves investors as they reach milestone birthdays. This choice is designed to deliver the appropriate level of growth for an investor’s savings according to his or her age, thereby protecting and building investors’ savings over the average 20 year investment term.

Although the popularity of the scheme continues to exceed expectations, with more than one million New Zealanders now enrolled, there still remains a good number of New Zealanders yet to enrol with KiwiSaver. Only 27% of people under 65 who are eligible have joined the scheme.

“This is a good time to join KiwiSaver since the current benefits of the scheme – the government $1,000 kick-start, the members’ tax credit and 2% employer contributions – all add significantly to your own salary contributions. For those who are already enrolled now is also a good time to talk to an adviser about the composition of your fund,� adds Boyle. “The first million member mark was reached well ahead of schedule.

“I’m very pleased that New Zealanders are readily adopting a savings habit for retirement. KiwiSaver is transforming the nation’s attitude to savings and the investor landscape. While the scheme has proved far more popular than anticipated, there is still a long way to go before everyone who is eligible to take advantage of the scheme has actually enrolled.�