KiwiSaver

The NZ Herald published a feature article on retirement income savings on February 28. The author was strongly critical of the New Zealand Superannuation Fund’s construct and recent performance. In response, Adrian Orr chief executive of the Guardians of New Zealand Superannuation had the following to say:

The fund is a simple concept. The government has legislated to invest money today to gain a return over the long-term. That return is to be used in the future to smooth the tax burden of the rising cost of superannuation income. One measure of financial success is whether the returns to the fund over decades are above the cost of government borrowing. This may or may not be the case over any randomly selected day, week, month, or year. In keeping with that we have deliberately and repeatedly highlighted the wide range of year-to-year outcomes we expect over the life-time of the fund, including negative ones. We have used our annual reports to illustrate this. A government is in a great position to benefit from investing over decades, more so than any individual. It can focus on the long-term and hence make investment decisions not available to many. It has the ability to ride out the tough patches and avoid ‘fire sales’. And, it can fund this activity at the cheapest rate and receive the tax on its local investment. The chance of investment success is as good as it can get. Right now, the earnings prospects for long-term investors have improved significantly. This is great for the Super Fund with the majority of contributions ahead. The global recession has seen asset prices fall and the rewards for accepting investment risk rise to historical levels. History also teaches us that the best time for investment returns is after significant downward corrections. However, we do not manage the portfolio around expectations of near-term events. Forecasting short-term is near impossible and leads to a lot of cost and lost opportunities. Exactly when a boom or bust will happen, what will trigger it, how it will unfold, and what the investment implications might be can not be forecast with useful precision – otherwise they would not happen. The forecasts the author of the feature article mentioned are long-term returns. Likewise, putting money only into cash or fixed interest dooms the fund to failure from the outset. The future retirement income liabilities, which follow nominal wages, will outpace the returns. Instead, the fund is invested for the long-term across a very wide range of assets that give us the best chance of buffering rising future retirement income payments. Diversification is the best means of managing investment risk. Imagine if we only had one asset and it happened to be the worst performing. A diversified portfolio removes that risk. And, we spend a lot of time on investment manager due diligence. Furthermore, whether a government’s operating accounts are in surplus or deficit makes no difference to the investment proposition of the fund. Neither do the returns to the Fund impact on the variability of the government’s debt program. The Guardians’ legislation was designed to provide clarity of purpose, operational independence, and transparency. It is recognised internationally for those features. When I took over two years ago following my role at the Reserve Bank, I inherited a set of investment assets selected to grow and to weather the long-term. These were chosen on a set of investment beliefs. Since then, we have been able to attract and retain world class people, and continue to implement a significant NZ and global investment strategy. We greatly increased our ability to manage and monitor our risk and liquidity, and invest in market-tracking indices, so that we are cost-effective and can avoid being forced to sell illiquid assets. We have raised the hurdle on our investment managers and let some go, and we have introduced tougher due diligence processes. And, we have deliberately reconsidered our global private equity and property strategies. Finally, we have benchmarked ourselves against the best in class long-term investing fraternity. They have all experienced the same challenges and remain committed to long-term investing. These are testing times which create the opportunities for long-term investors.

Unite has signed up “hundreds� of its 28,000 members to the Huljich KiwiSaver scheme, according to the union chief, Matt McCarten.

McCarten said while member sign-ups to Huljich have been minimal “this is just the start of the relationship�.

“This really a trial to see how it works,� he said.

Unite, which bills itself as the country’s “fastest growing private sector community unionâ€?, struck up a deal with Huljich in January to promote the KiwiSaver scheme to its members.

McCarten said Unite engaged a consultant to select an appropriate scheme to distribute after receiving numerous enquiries from members about how to choose a KiwiSaver provider.

“I did consider IRIS [a union-based KiwiSaver and superannuation scheme] and was approached by other unions to use it,� he said. “But we got a view of each scheme based around some criteria: it had to be New Zealand-owned; have an ethical investment policy, and; returns were also important.�

Huljich emerged from the pack based on these three crucial factors but it also “got� the message that many Unite members wanted to save for a house deposit through the KiwiSaver concessions.

McCarten said most of Unite’s members worked in highly transient service industries such as restaurants, were lowly-paid and mainly young.

“About half of the members are in their first job,� he said.

Unite collects a $40 fee for each sign-up to Huljich, which “just covers administration costs�, McCarten said.

Despite coming from different ends of the political spectrum – McCarten is a high-profile advocate of the left while Huljich directors include former National Party chief, Don Brash, and Auckland mayor, John Banks – he said the two organisations also share a “cultural affinity�.

“We’re both growing organisations, we work hard and we back ourselves,â€? McCarten said. “Although I would fight [Brash and Banks] all the way on political issues I’d trust them with my wallet.â€?

Huljich has also formed distribution relationships with associated mortgage-broking companies NZF and Mike Pero.

As at March 31, 2008, the Huljich KiwiSaver scheme reported just over $100,000 in funds under management, equating to about 50 members.

The Sorted website has been updated to include information for employers about the changes to KiwiSaver which come into effect on 1 April.

From 1 April employees will be able to change their contribution to the scheme from 4% of their gross pay to 2%, while the compulsory employer contribution will increase from 1% to 2%.

“The new information is on the site early to give employers time to assess what the changes mean for them and their staff,� Retirement Commissioner Diana Crossan says.

“By using Sorted’s KiwiSaver calculators people can work out how a change in their contribution would affect their retirement savings and decide what’s best for them.�

Employers can also download two free KiwiSaver seminars and material needed to run them. The seminars are designed to help staff understand the savings scheme and decide if it’s right for them.

Constant legislative changes to KiwiSaver are detracting from the original message behind the scheme of savings awareness and financial literacy.

The Association of Superannuation Funds of New Zealand (ASFONZ), which promotes workplace savings, held two forums recently, in conjunction with Inland Revenue, which involved nearly all providers of KiwiSaver schemes.

The Auckland and Wellington forums discussed issues of concern among providers to allow the smooth rollout of KiwiSaver changes and workplace savings schemes.

There was strong feedback from providers that they are now looking to the government for a period of regulatory stability for KiwiSaver.

“Constant rule changes have been costly for providers, ultimately impacting on KiwiSavers through direct costs and through the extent of resources that providers have had to commit to accommodating the changes,� ASFONZ chair David Ireland says.

He believes providers have had to meet considerable compliance costs which deliver “little or no benefit to existing KiwiSaver members�.

While Ireland believes the government should not rush further changes, he believes it does need to address concerns about some unintended consequences of changes already made, and remove anomalies from the original KiwiSaver provisions.

These include the risk of consumers losing their first home buyers’ subsidy if they reduce their member contribution from the current 4% to the 2% rate from April 1, 2009.

“Building certainty for KiwiSaver members is extremely important at present, and not only because of current investment market underperformance.

“It is also because constant rule changes since KiwiSaver was first announced have limited the industry’s ability to develop value-add enhancements for consumers,� he says.