KiwiSaver

New Zealand’s 3.168 million KiwiSaver members paid $692 million in fees in 2022, a 6.9% increase from the previous year. These fees – a combination of administration and management charges –  chewed up more than half of members’ investment returns, which this year dropped 90% to $1.3b.

Income from administration fees fell from $80.8m last year to $50.3m in 2022 but income from management fees jumped 12.8% to $642.3m.

These are among a raft of figures released this morning by the Financial Markets Authority (FMA) in its annual KiwiSaver report, covering the period from 1 July 2021 to 30 June 2022.

The FMA says the rise in fees reflects a 10% hike in funds under management, from $81.2b to $89.7b. Almost half of the rise in FUM was in growth funds, totalling $38.5b and up 17.7% year-on-year. Investment in conservative funds dropped by 14.4% over the year to $18.2b, largely because default fund members were moved to balanced funds which rose 20.8% to $26.4b.

The FMA says the shift in the amounts invested in different fund types is consistent with a longer-term trend where the numbers of investors in conservative funds (excluding previous default members) has shrunk 3.6% from 2017 to 2022 while growth fund membership has ballooned 54.8% in the same period, now accounting for nearly half of overall membership.

Contrary to what members might expect, the FMA says its KiwiSaver Tracker data reveals negative average returns for conservative funds for the year while growth funds reported positive average returns. “This is likely to be influenced by most conservative funds weighting towards bonds which suffered significant price declines.”

Of the 3.168m KiwiSaver members, only 1.9m are contributing. But the FMA says the $11.3m in contributions from these investors is largely behind the growth in FUM and includes a significant 20.3% increase in lump sum contributions, totaling $2.2b. Just over $5b in contributions came from wages and salaries last year.

Fifteen years after KiwiSaver was introduced, the average balance stands at $28,324. However, actuaries have pointed out that a few very high balances skew these figures, meaning the average balance doesn’t necessarily reflect the state of most KiwiSaver accounts which are likely to have considerably lower balances.

Membership withdrawals were up 24% to $3.8b over the year, with the over-65s showing a 59% rise to $1.95b. For the first time, retiree withdrawals exceeded those by first-home buyers, who collectively pulled out $1.44b. This spike was a “big surprise,” the FMA said, and was almost double the amount withdrawn the previous year. The number of retirees closing their KiwiSaver accounts was up 10% to 21,466 but the number of over-65s who remain in the scheme is up 14%.

With lower unemployment, significant hardship withdrawals were down 33.4% to $106m while withdrawals by those with life-shortening congenital conditions rose 49.9%. This is the first full year that people with Downs syndrome, cerebral palsy, Huntington’s disease and foetal alcohol spectrum disorder could automatically apply.

“The data in this year’s KiwiSaver annual report shows the strength of KiwiSaver as a long-term savings vehicle, with resilience to volatility a necessary feature of its design,” says Paul Gregory, the FMA’s director of investment management. “While we celebrate World Investor Week, the report reinforces our messages about taking a long-term view of investing.”

Gregory says New Zealanders have become increasingly aware of the role KiwiSaver can play in their financial well-being and preparedness for retirement, particularly when home ownership becomes less certain.

“This is the context for our work in KiwiSaver, including focusing on the value members receive for the fees they pay and the risk they take. This conversation about value is holistic in its approach, considering KiwiSaver providers’ investment returns, the help provided to members for good investment decisions and other value-adding features and services.”

As part of its value-for-money fees initiative, the FMA released a report in April this year which said the “repeatable competence” shown by fund managers is being eroded by high fees. Fund managers are not using appropriate indexes to benchmark their performance and managers often pay commissions to third parties to grow membership numbers, meaning all members incur outgoing fees and costs without this being clearly disclosed, the FMA said.

It will be cracking down in all three areas in the coming year via a self-assessment questionnaire for fund managers and “other regulatory tools” if persistent conduct issues are found.

However, the FMA says it has been encouraged by the drop in average fees paid by default members and only a small increase for active members. On average, default members paid $64 (down 11%) while active members paid $245 (up 2.1%).

The KiwiSaver company Kōura Wealth has started a petition to improve gender equity in retirement.

The petition will urge parliament to change the KiwiSaver Act so that a couple’s contributions can be pooled. 

This would create a Contribution Sharing Scheme, under which couples, either married or de facto, could share their KiwiSaver contributions.

This would ensure that people taking time off work to raise children would not be disadvantaged compared with their partners who keep on working.  

Such a change would reward both partners equally for their joint interest in raising a family.

At present, the law means that women who usually take time out for child rearing end up with less money in their KiwiSaver accounts when they retire.

Te Ara Ahunga Ora Retirement Commission has estimated the difference to be 20%.

The founder and managing director of kōura, Rupert Carlyon, has seen the gender gap many times in his career and says it creates a “sense of insecurity and lack of freedom that many forecast for their retirement.

“The team at kōura believe one size does not fit all and that couples should be given the option to make financial decisions that benefit them and their family.”

Carlyon said it would be a voluntary scheme with both parties needing to opt in. The value of the contributions would be split annually for as long as the couple wanted the scheme to last for.

The kōura petition is an alternative to earlier suggestions that the state could pay so-called care credits which would maintain KiwiSaver payments for a person taking time off work for a baby.

But the government has shown no interest in agreeing to this.  

Some companies make these payments available to highly valued staff, but lower paid people generally miss out. 

A splitting regime as proposed by kōura would be easier to manage and could be universal.

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.