KiwiSaver

Research showing many New Zealanders are not on track for retirement proves the need for advisers, ASB says.

Almost half of New Zealanders responding to the latest ASB KiwiSaver Survey thought they should be saving more than 10% of their income to fund their retirements but only 22% were doing so.

ASB head of KiwiSaver Aidan Vince said: “We have regularly asked if people are saving enough, and this survey as well as earlier findings show the majority of people don’t think they are on track.

"In the latest survey we asked some more specific questions in order to understand how people come up with their savings goals, and identify areas where people need some help.”

The survey showed although just 22% of people were saving more than 10% of their income, 46% thought they should be saving this much.

A further 16% and 18% respectively said they did not know how much they were saving, and how much they should be saving.

Half said they would need $50,000 a year in retirement.

When respondents were asked how they came to their figure, 15% said they used online tools, while 14% based their views on advice from family and friends.  A further 11% said they formed their own estimate, while the same proportion (11%) formed their opinion from information from media. Around 8% received advice from a bank, and 7% from a financial planner.

“While it’s good that some people have thought about this, a lot of the really solid advice and information that’s available appears to be untapped by the vast majority of investors in KiwiSaver,” Vince said.

“So the key message for these people that don’t know how much they’re saving or don’t know how much to save, is to call a KiwiSaver provider or talk to a financial adviser, because they can help with both of those questions.  Discussing the latest KiwiSaver changes to see what rate suits you is a great place to start to see whether you are on track or could save more."

ASB wealth economist Chris Tennent-Brown said the research showed the important role advisers had in understanding how much people needed to live on in retirement as well as planning an investment strategy to stay on track.

"Most people appear to not be on track, but aren’t getting advice from an adviser, which is disappointing. Around 8% of respondents say they received advice from a bank, and 7% from a financial planner – I had hoped that a lot more people would get advice from both sources."

New data from the Financial Services Council shows New Zealanders now have nearly $60 million in their KiwiSaver accounts.

The FSC said the total pool was now $58.53b, up $1.26b over the last quarter and 16.5 per cent in a year.

“The growth of the KiwiSaver pie is very encouraging news for New Zealanders, as it helps create long-term wealth for the 2.85 million Kiwis that are in the system,” said chief executive Richard Klipin.

“Recent changes introduced by the government, including the changes in contribution rates, new options for over 65’s and savings suspension are all contributing to improving the scheme.

"The figures show average individual KiwiSaver balances growing to just under $19,250, up around $500 over the quarter. These additional savings combined with a sustained period of market growth in New Zealand means now is the time for Kiwis to save for their future."

He said the financial services sector had the responsibility of helping New Zealanders build, manage and protect their welath.

“With other changes in the pipeline, such as the KiwiSaver Default Provider Review and CFFC Review of Retirement Income Policies coming later in 2019, these results are encouraging, as they show the individual wealth of those in KiwiSaver is growing," he said.

“Joining means that you can choose your level of saving, receive contributions from your employer and up to an additional $521.43 a year from Government which together mean your savings will grow quicker."

The risk with risk indicators

It is disappointing that a decade after the global financial crisis, New Zealanders continue to remain vulnerable because of the rules around risk indicators.

This is especially the case for bond investors, who are often conservative in nature and consider fixed interest a safe haven in times of volatility.

Unfortunately, after a decade of low interest rates, bond investors are also prone to “reaching” for higher yields, sometimes without understanding the risk they are taking. This is when risk indicators play a vital role – by helping New Zealanders understand how risky their “income” product is.

Given this backdrop, should a portfolio whose largest investment, comprising approximately a fifth of the fund, is an off-market, related party, private loan to a portfolio of shares, be given the same risk indicator as a term deposit from a major Australasian bank?

Sadly, this is what is happening. A portfolio (which we’ve chosen not to name) contains in its top ten holdings, an off-market, related party “geared investment loan” which makes up 19.09% of the portfolio. Of the top ten investments, seven are unrated. Yet its risk indicator is one, the lowest possible.

The fund is described as “entirely in income assets” and promoted as being “suited to investors looking for an on-call or term investment with a low level of risk and are willing to accept a relatively modest level of returns”. This is language which is commonly associated with bank accounts and term deposits. How is this possible?

HOW IS RISK MEASURED?

The Financial Markets Authority have done an excellent job establishing a standarised formula for risk which enables an “apples with apples” comparison. Risk is measured through a score of one (lowest risk) through to seven (highest risk).

Risk is assessed by taking the actual annualised volatility of the fund or asset class over the last five years.

WHEN IS VOLATILITY USEFUL?

Where an asset trades regularly, between a large number of willing buyers and sellers, with little transaction cost, then daily movements in price either up or down (called volatility) are an excellent measure of the risk. This is the case for listed (not privately held) shares, property funds, unit trusts and most commodities.

WHEN IS IT MISLEADING?

Unfortunately, volatility is a poor indicator of the risk of loss for assets that are priced infrequently and this includes bonds. For a start, most bonds including New Zealand Government bonds, are not listed, they trade off-market by appointment. Next, unlike perpetual assets, bonds are binary in nature: interest is either paid, or not, and at the end of the period your money is either repaid, or not. 

In a 150-year study of corporate bond default risk, the authors found bond defaults were not normally distributed. Instead, there were long-periods of little volatility or default, which were then followed by a short bursts of high volatility and a large number of defaults.

The investment grade bond credit default index is an excellent measure of the episodic nature of bond volatility and is shown below.

In the case of the income securities portfolio with its related party “geared investment loan”, the manager sets a “posted rate” in the same way as finance companies do. As a result, the volatility is low. Using the FMA’s current methodology for risk indicators, lower volatility equals a lower risk indicator.

WHAT IS THE ALTERNATIVE?

The alternative is to have risk indicators which reflect the type of assets a fund holds.

For example, a portfolio which is entirely invested in listed shares should attract the highest risk indicator, whereas one that is equally divided between shares and bonds should have a medium to high risk indicator, say three to five.

Funds holding cash, government bonds with a duration of less than three years, bank bills and investment grade bonds should have a lower risk indicator. In contrast, funds holding unrated bonds and related party loans should be required to have a higher risk indicator.

Interestingly, the website Sorted, run by the Commission for Financial Capability, categorises funds by asset allocation and not with the FMA’s prescribed risk indicator.

 

1. For further details contact NZ Funds.

2. Giesecke, K., Longstaff, F., Schaefer. S., and Strebulaev, I., 2011. Corporate bond default risk: A 150-year perspective. Journal of Financial Economics 102 (2011), 233 – 250.

NZ Funds KiwiSaver Scheme is designed for use by AFAs and RFAs and pays both planning incentives and an ongoing commission for advice. 96% of NZ Funds’ KiwiSaver members have a financial adviser. The average balance of members of the Scheme is $27,194 approximately one and half times the national average of $17,834.

BNZ has cut the fees it charges across its KiwiSaver funds and is shifting to an passive approach for international assets.

Chief customer officer Paul Carter said: “The onus is on financial institutions to do everything we can to remove obstacles, to make things simpler, and give people better tools and advice. That’s why we’re making major changes to our KiwiSaver offering."

From May 1, BNZ will remove the $1.95 monthly member fee and reduce management fees from up to 1.1% a year to a maximum of 0.58%.

“These changes remove important barriers to choosing the best fund for a customer’s needs, with the moderate, balanced, and growth funds now all on the same low fee. By this action, we’re removing fees as a consideration when deciding what fund to go into,”  he said.

Under the new structure, a person with $20,000 invested in the BNZ Growth fund would have their fees more than halved, from $243 to $116.

“We’ve re-written all of our disclosure documents and communications in plain English," Carter said.

"We’re rolling out new tools for our bankers to help them have better conversations with customers and help them pick the right fund for their needs. We’re also putting more tools in the hands of customers, with calculators to help compare the different funds and returns over time."

BNZ is also changing the way the underlying investments are managed, shifting to an index management approach for international assets, while keeping the actively managed approach for Australasian investments.