KiwiSaver

Sir Michael Cullen: The man who helped New Zealanders make better financial decisions.

Every now and then someone comes along who, in their lifetime, puts in place changes which touch not only everyone in their generation, but generations to come. Sir Michael Cullen is one such person.

In 1898, the government of Richard Seddon introduced a means-tested “old age pension”. This pension was available for people 65 and over and was worth around one-third of the average wage. This pension, like most of the later changes, was funded out of current
taxation rather than through a separate investment fund. Subsequently, the age of eligibility declined to 60 and the pension as a percentage of the average wage increased.

However, those who were fortunate enough to be employed by a responsible employer – like my father whose employer was the Auckland Hospital Board – could contribute a portion of their salary to a superannuation fund which paid either a lump sum, or an annuity or the rest of their life based on a percentage of their final salary. 

Life in New Zealand was good. But over the course of a generation things were to reverse. Many financial commentators cite the high inflation of the 1970s, the debt taken on to pay for “think big” projects and the decision to remove the tax deduction for private superannuation payments, as the cause of our nation’s reversal in fortune. But it was only the first in a series of extraordinarily poor financial decisions that led to our current predicament. 

Over the course of several decades, successive New Zealand governing parties decided that individuals who were able to directly manage investments in property or the shares of listed or unlisted companies should pay no capital gains tax. Meanwhile those individuals who relied on others to manage their money were forced to pay full corporate tax rates of around 33%, irrespective of which personal tax bracket they were in.

 

 

This contributed to the eighties property and share market booms and subsequent busts, and the gradual decline of the superannuation industry. No one was interested in offering professionally managed retirement funds because of the 33% tax rate. 

Those with property or share management skills got wealthy, while regular savers got penalised. At the same time the age of eligibility for NZ Super rose to 65 and the payment fell to 33% below a “no frills” lifestyle.

In 1992 – a year after Australia introduced compulsory superannuation contributions for all its citizens – New Zealand formed the Todd Taskforce to question whether compulsory retirement savings should also be adopted by New Zealand. Headed by Auckland accountant Jeff Todd, they concluded that a compulsory superannuation option would be “an over-reaction to averting a future fiscal problem”.¹ It is arguably one of the worst financial decisions New Zealand ever made. As a consequence, the average Australian citizen now has around $145,000² in superannuation savings. New Zealand’s average KiwiSaver balance has just hit $19,500.³

In the 2000s, Michael Cullen (now Sir Michael) changed all of this with three farsighted decisions: the portfolio investment entity (PIE) tax regime, which restored equality of capital gains tax between investing individuals and professionally managed portfolios; the creation of the New Zealand Superannuation Fund – now a world class sovereign fund manager; and KiwiSaver through which New Zealanders have already amassed $57 billion.³ Despite poor historical decisions, one person managed to put New Zealanders back on track.

We all have a role to play in continuing to build on Cullen’s legacy by ensuring that New Zealanders continue to make the best possible financial decisions. The upcoming selection of default KiwiSaver managers will be a significant step on the journey toward becoming a more financially prosperous nation. It is sad to hear that Sir Michael Cullen is unwell. Our thoughts go out to him and his family.

Source: FMA 2019 Annual KiwiSaver Report, New Zealand Superannuation Fund 2019 Annual Report.

1. Todd Taskforce 1992. 2. Australian Bureau of Statistics, 2017-2018 balances. 3. FMA 2019 Annual KiwiSaver Report.

Disclaimer: Michael Lang is Chief Executive of NZ Funds and his comments are of a general nature

Michael Lang looks at KiwiSaver asset allocation and discusses the benefits of diversification.

Over the last decade New Zealand shares outperformed global shares by 120%. New Zealand shares now trade at a premium to their global counterparts.

Whether your KiwiSaver manager favours local shares over international ones has been an important determinant of historic relative performance, and if history is any guide, it is likely to continue to be so. Despite this there is a paucity of research on local managers’ asset allocation.

WHY DO MANAGERS FAVOUR LOCAL SHARES? 

The basic problem is something called home bias. Investors and managers the world over prefer companies that are listed on their home exchange. These companies follow local laws and regulations, report and are reported on locally, and raise capital and hold AGMs locally. They are therefore easier to follow than their  international counterparts.

In some countries a home bias is more than the warm fuzzies. In New Zealand for instance, the tax regime provides advantages for local investment. For example, Australasian shares are not taxed on capital gains and New Zealand shares enjoy the benefit of imputation credits, removing the potential for double taxation on company distributions. Outperformance during the most recent decade has not hurt allocations either.

WHY OWN INTERNATIONAL SHARES? 

Despite this, there are compelling reasons to be globally diversified. It rarely makes sense to put all your retirement eggs in one basket. When the New Zealand economy faces a regional downturn, as occurred during the Asian crisis of 1997, it is useful to be able to draw down on a portfolio of strongly performing global shares.

Whether managers use risk-parity, minimum-variance, mean-variance, or the more sophisticated Bayes-Stein or BlackLitterman, the conclusion is broadly the same – the right allocation to international shares increases clients’ prospective returns, or for the same level of return reduces their risk. 

WHAT IS THE OPTIMAL ALLOCATION TO AUSTRALASIAN SHARES?

One way to work out a portfolio’s optimal Australasian share exposure, is to look at volatility (or variance) instead of return. New Zealand shares will always have a tax-based return advantage but this does not always manifest itself in superior returns – for example, from 1994 to 1999 international shares returned around twice as much as New Zealand shares.

Using minimum-variance to optimise asset allocation gives a range of technically superior allocations – all of which are broadly equal – and shows what is not optimal. The optimal range extends from a minimum allocation to Australasian shares of around 30% where the SuperLife Growth Fund, NZ Funds LifeCycle – age 0-54 and ANZ Growth Fund sit, to a maximum of 55% where the Milford Active Growth Fund is positioned. Funds outside this range are, on this analysis, sub-optimally positioned, most notably the Kiwi Wealth Growth Fund – although the Juno Growth Fund, Mercer Growth Fund and Booster Asset Class Growth Fund also sit outside
the optimal range. Nevertheless, they may have performed well historically. How funds perform in the future will, to a large degree, be determined by their asset allocation. 

 

Disclaimer: Michael Lang is Chief Executive of NZ Funds and his comments are of a general nature. New Zealand Funds Management Limited is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest Product Disclosure Statement is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.

 

KiwiSaver provider Generate is encouraging advisers to refer clients who are worried about its recent hack back to its website.

It revealed last week that there had been illegitimate access to its systems. Data about 26,000 members, including their ID documents and passwords, was accessed.

“We know that advisers are fielding questions from clients about this incident, both from affected Generate members and others. We want advisers to know that having taken immediate steps to secure our systems, we are working very hard to assist their clients who were affected,” said chief executive Henry Tongue.

“On Wednesday, as we were sending emails to all our members, letting them know whether or not their personal information was involved, we also contacted all the subscribers to our advisers’ mailing list, alerting them to the incident and recommending ways they could assist their affected clients.”

He said advisers who had clients in the scheme should ask them to log into their Generate account so they could see what information was involved.

They should also go to the website for steps to take to prevent harm.

"Advisers can also assure their clients that this incident affected our online application system information solely, and not our members’ KiwiSaver or other investment accounts, or the investments themselves, which are held in a completely separate system.

"As an organisation we take the protection of our members’ data very seriously. Unfortunately, as advisers will know, malicious attacks of this nature are becoming more common both in New Zealand and globally, so constant vigilance is required, which is why we are taking longer term steps to further strengthen the security of our systems. This is a key priority for us alongside continuing to perform strongly as an investment manager to deliver results for our members.”

Lifestages funds are a better option for savers than default KiwiSaver funds, but they’re not all created equal, new research from MyFiduciary suggests.

The research was commissioned by NZ Funds and reviewed the lifestages options available in New Zealand.

Nine out of 22 KiwiSaver managers offer a lifestages option. These reduce the level of risk an investor is exposed to over time.

David Rae, an investment consultant and principal at MyFiduciary said the research found that the average fund was too conservative overall and started de-risking too early.

There are two main approaches to lifestages investment – one makes small regular changes to asset allocation while the other undertakes less frequent but bigger steps. AMP, ANZ, Generate and Lifestages opt for the latter.

Bigger steps could be a problem if rebalancing coincided with a bad time for the equity market. Rae said a smoother approach was much better.

But he said in general any lifestages approach was better than a single setting for an investor’s overall outcome.

“The right investment allocation for a 25 year old is very different o a 65 year old … you’ve either got to be pretty active through your investing life to make sure you are getting the right setting … or you do it automatically through a lifestages approach.”

The Government has proposed requiring default KiwiSaver funds to take a lifestages approach.

Rae said this would be an improvement.

People were more likely to choose a lifestages option than to opt for a high-risk investment fund if presented with a menu of options, he said, and default funds would never be set at the 80% growth allocation that would best suit many young investors.

But they could be delivered those results through a lifestages fund.

Early de-risking remained a problem, though.

The research showed that ANZ had people in zero growth assets at 65, despite potentially having another 30 years to live.

Some started to dial down risk when investors were in their 40s, Rae said.

“In terms of total accumulation of wealth through the life cycle that’s early in dollar terms.”

MyFiduciary modelled a person who starts saving at age 25, has an income of $75,000 that grows through time, and saves 4% of their income (plus a 3% employer contribution).

The average of all balances at 65 was $426,000.

Savers who chose NZ Funds, Fisher Funds or SuperLife achieved a higher level of expected wealth at retirement after fees.