KiwiSaver

Financial advisers who raised concerns about KiwiSaver have been told a review of default provider arrangements will consider those issues – but not until next year.

A group of AFAs, headed by John Cliffe, wrote to Commerce Minister Kris Faafoi, Finance Minister Grant Robertson, Reserve Bank Governor Adrian Orr and FMA chief executive Rob Everett.

The advisers want all default funds to be balanced options, to ensure IRD gives default managers the correct tax rates for members, to remove all members in a default fund after 12 months by switching them out, and to introduce a white-labelled government balanced fund for those members.

They said banks had been the big winners out of the retirement savings scheme.

In response, Faafoi said he agreed KiwiSaver was essential to improve New Zealanders’ wellbeing in retirement and it was crucial to get the settings right.

“Next year the Minister of Finance and I will start a review of the default provider arrangements, recognising that the current appointments expire in 2012. The review will include consideration of the default provider settings and will enable us to consider many aspects, including the points you have raised.”

NZ First’s KiwiFund Bill, which would have had a working group set up to investigate a government-owned and run KiwiSaver provider, has been withdrawn.

But its backer, Fletcher Tabuteau, will be involved in the review of default funds, which may indicate the idea has not been as completely abandoned as some have suggested.

Cliffe said he expected the review to be the subject of greater focus over the coming year.

NZ Funds has launched a new pension transfer service with a difference: its nationwide UK pension transfer team are offering to do the transfer advice and processing free of charge, before passing the client back to their adviser to be advised within the context of their usual ongoing advice relationship.

“Just over a year ago we identified two problems in the pension transfer market. First, while almost all advisers have clients with international investments in their client base, the process of advising on UK pension transfers is so complicated and tedious, their advisers were often unable to help those clients,” NZ Funds Principal David van Schaardenburg says.

“Second, when clients were transferred there were a limited number of available investment solutions, many being based on either antiquated schemes or schemes managed by financial advisers, not licensed fund managers. This has come about in part due to the UK’s HMRC deregistering KiwiSaver schemes as QROPs in 2015. A number of the schemes still registered as QROPs also charge significant front-end fees and exit fees. Furthermore some profit from taking hefty currency margins when converting client funds from Sterling to Kiwi. It feels a bit like the fund industry was in the 80’s. Some who do offer a modern Superannuation Scheme to transfer to do not provide a transfer service, leaving it up to the adviser to navigate the complexities and administration of the pension transfer process.”

With the launch of NZ Funds’ UK Pension Transfer Service, to complement the modern cost-effective Superannuation Scheme it launched a year ago, the manager has overcome both points of pain. Advisers can now pass their client on to one of NZ Funds pension transfer team, who will process the transfer (free of charge) and then pass the client back to the adviser. The adviser can then set their remuneration for advising the clients in the usual way such as evaluating client risk profile, their optimal asset allocation, sustainable savings and withdrawal rates plus navigating changes in clients’ financial objectives or circumstances.

Funds transferred from UK pensions are managed through the NZ Funds Managed Superannuation Scheme which now has a strong one-year investment track record. The Growth Strategy delivered a 14.7% return over the last 12 months, and 16.4% since inception as at 31 July 2018¹. The Scheme also has a choice between adviser directed asset allocation or automated annual lifecycle rebalancing. The lifecycle technology is based on the same proven process used by the NZ Funds KiwiSaver Scheme.

“Feedback to date has been very encouraging. In addition to NZ Funds’ seven nationwide offices, a number of independent advisers have already signed up to the service with several dealer groups now undertaking due diligence on our transfer service,” van Schaardenburg says.

“What is more exciting in our view is that the service has been able to add value from day one to complement the other important international investment transfer service we provide to advisers and their clients being transfers from Australian Superannuation Schemes.”

A recent NZ Herald story on 2 August 2018; “Sneaky life insurance fees catches out Kiwi woman…” highlighted an insidious problem with many Australian Superannuation programs. In Australia, life insurance is often built into the superannuation schemes. You need to opt out to not have it. This type of group insurance has a number of benefits such as lower premiums and in some cases the fact that it will cover pre-existing conditions. However, the insurance coverage will often end when you are no longer an Australian resident. Despite this we’ve found Super providers who have continued to charge clients the insurance premiums even after being advised of member relocation to New Zealand. Through our Australian Super Transfer Service, we have been able to negotiate a refund of premiums, backdated to when the client left Australia.

Many New Zealanders (and recent immigrants) put off the decision to transfer. After all, retirement is still years away and the money should snowball until then. Or so the thinking goes. Sadly, when it comes to UK pension transfers the cost of procrastination can be prohibitive. After an initial four year exemption period, returning New Zealanders and immigrants accrue a New Zealand tax liability each year just under 5% of the final pension transfer value. By way of example, a person who puts off transferring for 15 years from return/arrival could lose up to 16%² of the value of their savings in tax.

By educating accountants, lawyers and financial advisers throughout the country on how to transfer cost effectively, and by eliminating these points of pain, we are seeing a rising flow of clients reducing or eliminating costs and taxes that might otherwise have accrued. “It is great to be delivering value to advisers and their clients and getting two sets of positive feedback” van Schaardenburg says. “It really is a case of helping New Zealanders (including the newer ones) to make better financial decisions”.

 

¹ Growth Strategy inception date, 25 January 2017. Returns are post fees, pre-tax. Past performance is no indicator of future performance.

² Assumes GBP/NZD exchange rate 0.52, the Schedule method as the calculation option, the client has other income over $70,000 in the assessable tax year.

The recent announcement that the NZ Super Fund was considering investing in the Government’s proposed Auckland light rail networks has re-ignited calls for KiwiSaver to be used to fund local infrastructure investments.

On the surface, the case for investment in long-term infrastructure assets appears compelling. Infrastructure projects are long-term, defensive investments that often come with monopolistic characteristics.

Historically, many infrastructure projects have offered compelling rates of return. 

Auckland alone is estimated to need $7 billion in infrastructure spending over the coming decade as the city expands by the size of Tauranga every three years (1).

KiwiSaver, being a long-term investment vehicle with over $46 billion in funds, appears well placed to help fund these projects. 

But like many things in finance, when subject to rigorous analysis, cracks appear. There is no reason why infrastructure assets offer superior returns.

Over the long-term, sector analysis shows infrastructure assets offer no better or no worse rate of return than any other sector of the economy such as healthcare, media or telecommunications. 

The perception that infrastructure projects offer superior returns may come from the use of leverage. Because infrastructure assets are long-dated and defensive in nature, banks and private bond holders have traditionally been willing to lend a considerable amount of a project’s cost.

But debt turbo charges losses as well as profits, as investors in RiverCity Motorway Group, which funded construction of a toll road in Brisbane, found out when it went bankrupt in 2011 after traffic volumes fell short of projections. 

However, the biggest problem with funding a project like Auckland’s light rail through KiwiSaver is liquidity and asset pricing uncertainty.

The Guardians of New Zealand Superannuation can consider long-term private market assets like forestry partnerships or an infrastructure project because they have a single long-term client who is unlikely to withdraw their capital at short notice. 

In contrast, KiwiSaver is made up of 2.8 million individual accounts, each with its own time-frame and agenda.

Last year alone $614 million was withdrawn for first home purchases, $81 million for hardship and $631 million by retirees. More importantly, there are now over 240 options for KiwiSaver members to choose between.

Switching schemes is costless and quick, as long as the underlying assets are accurately priced and liquid. 

What happens, however, when the clients of one scheme holding a long-term illiquid infrastructure investment decide to switch to another scheme? Private market assets are both difficult and expensive to price, so pricing is only reviewed periodically.

Even where there is a recent ‘price’, there is often no ability to transact at that price. When a private market investment is successful, existing unit holders may suffer from undervalued asset prices as their investment is diluted by new investors entering the fund.

Even worse, if a private market asset goes bad, then it’s “first out, best dressed”.

This means the first investors to exit the fund will get a better price than those left behind. If a fund shrinks too fast, illiquid assets can grow in weight, even as they fall in value, as they cannot be sold to fund redemptions.

In the end, this leads to the fund being frozen, to prevent investor inequality, until the fund is wound down by selling the illiquid asset (or the asset is written off). This process can take years.

You do not have to cast your mind back very far to find a strikingly similar situation of liquidity mismatch.

Finance companies were billed as offering New Zealanders a superior rate of return to term deposits, for a “first ranking debenture” on long-term stable infrastructure like assets, in that case property.

Unfortunately, investors had the right to periodically withdraw their funds, while the underlying projects required years of funding to come to fruition.

There is absolutely no reason why KiwiSaver cannot be used to fund long-term infrastructure projects, as long as they are listed. The purpose of the share market is to provide companies with a source of long-term capital and investors with transparent pricing and daily liquidity.

The listed market also provides KiwiSaver investors with rigorous regulatory oversight, strict governance standards and continuous disclosure rules, all of which do not apply to private market assets.

Auckland International Airport, Port of Tauranga and Chorus are three excellent examples of listed entities which have used the share market to fund long-term New Zealand infrastructure investments.

Interestingly, there is currently no restrictions on KiwiSaver schemes investing in illiquid, private market assets, as long as they are ‘disclosed’ to investors. It is not a requirement to disclose the overall level of indebtedness, governance standards, duration of the project, or future funding requirements, or to provide the market with continuous disclosure. To date, a number of providers have taken advantage of this by purchasing private market assets.

Requiring KiwiSaver managers to invest members’ funds in marketable assets with liquidity would in no way detract from the ability for KiwiSaver to be used as a source of long-term infrastructure capital, but it would significantly enhance the structural integrity of KiwiSaver. KiwiSaver is not New Zealand’s first attempt at funding our retirements, but to date it has been our most successful, thanks to the growing relationship of trust between the public and the managers of their assets.

Anything that threatens this relationship of trust should be prohibited.

1. The Nation, Interview with Phil Goff, 3 June 2017.
2. Source: NZ Funds analysis: New Zealand Sharemarket sectors include Property, Infrastructure, Utilities, Retirement Villages, Chorus, Spark and New Zealand Refining. Australian Sharemarket sectors include Property, Infrastructure and Utilities.

 

Morningstar says there’s no clear differentiating factor that makes high-performing KiwiSaver funds stand out.

Its latest KiwiSaver survey, to June 30, showed returns bounced back after a tough start to the year.

“Australian and New Zealand equities led the way, while the falling New Zealand dollar helped ensure solid global equity returns. As a result, those KiwiSaver investors in the Balanced and Growth-orientated schemes had the strongest returns,” Morningstar director of manager research ratings Asia-Pacific Chris Douglas said.

Top performers over the quarter against their peer group include ANZ Default KiwiSaver Scheme Conservative (Default) 1.85% (Multisector Conservative),Generate KiwiSaver Conservative Fund 3.51% (Multisector Moderate), Summer Investment Selection 5.50% (Multisector Balanced), Generate KiwiSaver Growth Fund 5.85% (Multisector Growth), and Booster KiwiSaver Geared Growth 7.04% (Multisector Aggressive).

Evaluating the performance of a KiwiSaver scheme during longer periods provides a more meaningful assessment.

During the 10 years to June 30, Milford Active Growth, Milford KiwiSaver Balanced, Fisher Funds KiwiSaver Growth and Aon Russell Lifepoints, and ANZ KiwiSaver were the top-performing options in their respective categories.

Douglas said there was no clear factor that made those successful.

“Managers like Milford are very active and started out with a very large New Zealand book and have done well out of the New Zealand market and then become more diversified as they’ve grown larger.”

Fisher Funds had been similar, using small-cap investments to leverage growth. Aon Russell had large biases to global fixed interest and equities, which had been a sweet spot over the past few years, Douglas said.

ANZ was consistent with a consistent framework and some tactical asset allocation. “In some ways ANZ shows the most resilience of all of them. They’re all very different with different biases in their with the potential to general returns from different parts of the portfolio. That’s what makes KiwiSaver interesting.”

KiwiSaver assets on the Morningstar database grew to $48.8 billion at June 30, from $35.7 billion at the end of 2016. ANZ is the largest KiwiSaver provider with a market share of 25.2%.