KiwiSaver

Retirement Commissioner Jane Wrightson is calling for KiwiSaver to be made compulsory and the minimum contribution rate ramped up to 5%.

 

But she doesn’t think the current government will be brave enough to make these changes which, she believes, are needed for KiwiSaver to remain fit-for-purpose over the net 30 years.

Wrightson thinks, however, that “a government-in-waiting” might be persuaded. And she is urging the financial services sector to collaborate with the Retirement Commission and put some proposals to the current government.

“There’s a really good opportunity at the moment for the industry,” she says. The government’s planned review of KiwiSaver has been stalled because of Covid-19 and other priorities, meaning there’s a small window of opportunity for the industry to agree on improvements and get them in front of the minister. But with an election looming next year, “there’s only a limited time before this door shuts”.

Wrightson’s comments came during a panel discussion on what KiwiSaver might look like in 2050 at the Financial Services Council’s annual conference in Auckland last week.

Wrightson said the FSC’s own research showed 78% of New Zealanders support compulsory contributions to KiwiSaver. But what can be done about those who genuinely can’t afford it – about 20% of the eligible population?

“The trouble is that question often dominates the discussion,” she said. “We may need to carve them out but for the vast majority of people, it’s doable.

“I know the problems, there would have to be a floor below which you wouldn’t require it because we are still a low-wage economy. But if you look at us compared with Australia, it’s just a no brainer.”

KiwiWealth chief executive Rhiannon McKinnon suggests a staggered approach, where those struggling to save start contributing 1% of their income to KiwiSaver, with the contribution level rising over time.

Another way, Wrightson says, is for compulsion to apply only for those joining the workforce for the first time. 

But she believes a rebranding is needed. “I don’t think people see KiwiSaver as a retirement plan. They see it as a savings plan,” she says. That became very clear during lockdown when applications for hardship withdrawals rose sharply. “And as the amount gets bigger it becomes more and more tempting to put the hand in the lolly jar.”

More research is also needed on first-home buyers and whether they continuing to contribute to KiwiSaver after making a withdrawal to fund their house deposit, she says.

“We don’t have enough data. Do they contribute the same or better or do they focus on the mortgage? We don’t have enough knowledge about behaviour which is something the commission will be looking at a bit harder in the next year.”

University of Auckland Associate Professor of Economics Susan St John said she supported Wrightson on compulsion. KiwiSaver “works brilliantly” and had been well-branded to the point where everyone was aware of the scheme. But it has a fundamental weakness: it is based on the male model of a traditional, unbroken 40-year career in fulltime, paid work which doesn’t suit most women “and doesn’t suit many men well, either”.

She and McKinnon said there was now a greater consciousness about gender issues and KiwiSaver, particularly among women themselves.

St John would like to see the employer contribution, currently 3%, paid to employees regardless of whether they were contributing to KiwiSaver. Women are badly disadvantaged because they are missing out for the 10-20 years they were absent from the paid workforce raising children.

“We can do something about that if we think about it carefully enough,” she said.

“We have to recognise that KiwiSaver is an upper-income program that has suited the Pakeha population and we need also to pay attention to those who lose work later in life through no fault of their own. They get a very insignificant benefit and find their position eroded by the time they get to retirement.”

Westpac Head of Investments Nigel Jackson says part of the problem is that nobody within government is responsible for KiwiSaver, meaning there is no accountability to ensure it meets its objectives. The industry needs to start influencing the policy debate in four key areas: participation, contribution, access and withdrawals, and investment risk, he says.

Levying GST on KiwiSaver and managed funds fees could slice $186 billion from New Zealanders' saving balances by 2070.

A proposal to add 15% GST to services supplied by investment managers to managed funds and retirement schemes was introduced to Parliament on Tuesday by revenue minister David Parker, under the Taxation (Annual Rates for 2022-23, Platform Economy and Remedial Matters) Bill.

In a briefing paper to Parker, the Inland Revenue Department (IRD) has proposed repealing an existing GST exemption for the management of a retirement scheme to ensure certainty and consistency in the treatment for management services, and "simplify" compliance.

The IRD estimates that if the bill becomes law, it will collect $225 million per year from April 2026, and accepts that this cost will flow through to retail investors in the form of higher fees.

That will also have the effect of reducing 'after-fee' returns and therefore the total amounts that are reinvested and saved over time.

Modelling by the Financial Markets Authority (FMA) shows this option will lead to KiwiSaver fund balances, of $2.2 trillion, being reduced by $103b by 2070. Fund balances for non-KiwiSaver managed funds of $1.67t, would be lowered by $83b.

There are more than 1,000 funds currently on offer to retail investors.

Significant change

In a note, law firm DLA Piper said the move is a "significant departure" from current practices and will have an impact on managers, investment managers and the funds they manage.

DLA Piper said that, as drafted, a manager or an investment manager will be able to fully recover GST at 15% on their management costs, although managed investment schemes may incur a greater GST bill that is passed to them from their manager and/or investment manager.

Under IRD modelling, an investor with $100,000 invested in a fund charging a 1% fee would pay a $1,000 annual fee as it stands.

Under the proposed reform, that annual fee could increase by up to $96, to become $1,194 for the first year after the reform. And after 25 years of regular contributions, the investor who built up a $862,308 balance under the current tax settings, would pay $21,179 extra in tax, leaving them with a balance of $841,128.

Investors in such schemes already pay tax through the portfolio investment entity scheme, where investment income is taxed at a slightly lower rate than income tax.

Morningstar reveals another bad quarter for KiwiSaver funds

Market turmoil during the past six months has wiped $6.3 billion from KiwiSaver funds, $4.6 billion of it in the past three months.

Morningstar’s KiwiSaver survey for the June quarter 2022 reveals KiwiSaver funds now hold $82.2b in assets, compared with $87.3b in the March 2022 quarter and $89b in December last year. However, this year’s June quarter figure is only slightly down from June 2021, when KiwiSaver funds held $83b in assets.

In explaining the downturn, Tim Murphy, Morningstar’s Asia-Pacific director of manager selection, painted a gloomy but by now familiar picture of world markets racked by war, global GDP contraction as the Chinese and Russian economies slow, household spending falling short of expectations in the US and higher-than expected global inflation.

In New Zealand, the S&P/NZX50 was down 10.2%, with large caps Fletcher Building, Fisher & Paykel Healthcare and Mainfreight reporting negative quarters. Only Spark showed a positive return (4.8%). The Australian sharemarket also performed badly.

“KiwiSaver funds generally reflected the challenging underlying market conditions experienced over the June quarter,” Murphy said.

Top performers for the quarter included QuayStreet Income (-2%, conservative fund), Juno (-3.5%, moderate), InvestNow Castle Point 5 (-3.7%, balanced), QuayStreet Growth (-5.3%, growth) and Aon KiwiSaver Russell (-7.9%, aggressive).

Of the six default funds appointed last year (BNZ, Booster, Kiwi Wealth, Simplicity, Super Life and Westpac), Morningstar said there had not been enough time to properly assess performance. But in the year to date, four of the six had trailed the balanced category average.

Morningstar says it prefers to assess fund performance on long-term returns. Over the past 10 years, aggressive KiwiSaver funds returned an average of 9.3%, growth 9%, balanced 7.3%, moderate 5.2% and conservative 4.5%.

Morningstar reports fund returns after fees but before tax.

The six largest KiwiSaver funds account for 69% of the assets on the Morningstar database. ANZ is the biggest with $17.1b in assets, ASB has $13.2b, Westpac $8.8b, Fisher Funds $6.4b, Kiwi Wealth 6.3b and AMP $5.4b.

In what’s believed to be an industry first, the NZ Society of Actuaries has produced a report that analyses account-level data for a large segment of the KiwiSaver market.

Until now, nothing been published about the actual balances of KiwiSaver’s 3.09 million members, with most statistics focusing on averages. For example, the FMA’s annual KiwiSaver report for 2021 says the average balance across all funds is $26,410. Previous surveys of KiwiSaver accounts have been limited to average balances, total fund size and total contributions.

But averages don’t tell the whole story, says Ian Perera, the convenor of RIIG (the Retirement Income Interest Group, a subgroup of the NZ Society of Actuaries) and are “not particularly helpful” when it comes to KiwiSaver.

They tend to be higher than the median, which produces a more realistic picture as a few large balances can skew the average. “You learn a lot more by understanding the differences than by just taking the average,” he says.

RIIG’s survey and analysis focused on how individual account balances are distributed, revealing a cluster of low KiwiSaver balances at the bottom of the scale and a “tail” of large balances, including a few outliers of more than $1 million, at the other end.

So, for most members the balances are “modest”, meaning that for those near retirement, NZ Superannuation will still be a key part of their income, Perera says. The median balances in RIIG’s study for those aged between 60 and 64 were $38,000 for men and $31,400 for women. In the 64-84 age group, 17% of men and 13% of women have balances of more than $100,000.

RIIG’s information was gleaned from six KiwiSaver providers which supplied anonymised data about the accounts they manage for members aged 45+. The providers included bank-owned funds and specific fund managers. All are among the top 20 providers as of 31 March 2021 and three are among the top five. Information was supplied on each member’s date of birth, balance and fund type.

The first finding was no surprise. Men are more likely to have larger balances than women and are significantly more likely to have the largest balances: 13% of men in the 45-64 group have more than $100,000 in their accounts compared with only 6% of women. And at the other end, women are more likely to have balances of less than $50,000: 74% compared with 64% of men.

When it comes to fund choice, however, gender does not appear to be an indicator of tolerance for risk – at least, not until members hit 65. “The data does not support the idea that women between 45 and 64 are more conservative investors than men,” Perera says.

Across the board, the study found that most investors aged 45-64 choose conservative funds, with only 35% of women and 39% of men invested in funds holding at least 60% of growth assets.

The rule of thumb appears to be the lower the balance, the lower the risk tolerance. For those with account balances between $10,000 and $20,000, 45% of accounts held by men and 47% held by women are in funds with only 30% of growth assets. Only 21% of men and 18% of women are in more aggressive funds (75%-100% in growth assets).

When the government contribution of $521.43 a year is added, men clearly contribute more to KiwiSaver, with 46% of men and 33% of women putting in more than $4000. At the other end of the scale – annual contributions of less than $3000 – women make up 52% of the group compared with 43% of men. Perera describes these results as “not unexpected” as men in the 45+ population usually earn more than women, and KiwiSaver contributions are primarily made as a percentage of salary.

When it comes to drawing down KiwiSaver in retirement, Perera says low balances in the 55-64 age group mean that for most people, individual financial advice is not cost-effective. Most will need to rely on generalised guidance. But managing drawdowns is “one of the hardest problems in finance”, he says.

The way up is almost straightforward: save more, ensure you’re in a diversified fund and get your risk settings right. “But when it comes to ‘how much can I spend?’ there are so many different factors to consider. You don’t know how long you’re going to live, and inflation could be more significant. It’s a harder problem in some respects than saving.”

Perera says he hopes the FMA and Retirement Commissioner can use these survey results to develop a larger dataset that can be analysed to form a whole-of-sector view.

Now that it has data for the 45+ age group, RIIG’s next project will be to figure out what current KiwiSaver balances might look like when these members reach retirement.