KiwiSaver

Tax changes to KiwiSaver are needed to encourage New Zealanders to start saving enough for their retirements, an AFA has told the Tax Working Group.

Drew Hoffman, an authorised financial adviser at Newton Ross, said New Zealanders were saving too little in KiwiSaver – and the lack of tax incentives on the scheme could be to blame.

He said it compared unfavourably to other countries’ structures. In the UK, contributions and fund growth are not taxed but distributions are. In the US, under the Roth option, contributions are taxed, growth is not, and distributions are not.

“Once an employee has contributed up to 3% of his or her salary, there is no incentive for him or her to contribute anymore under the KiwiSaver scheme. A contribution rate of 3% for most people is not going to result in a comfortable retirement,” Hoffman said.

“With the amount of New Zealand Superannuation likely to diminish because of population demographics, the New Zealand government needs to incentivise Kiwis to save more.”

He said the Roth option would be good choice for New Zealand.

“Income and growth on current amounts in KiwiSaver accounts would no longer be taxed and income and growth on additional contributions would not be taxed. I recommend that the limits on contributions be set at $15,000 per annum or 15%, whichever is lower, for employees under age 50. Employees aged 50 and over should have limits of $20,000 or 20%, whichever is lower, to encourage savings for those nearing retirement.”

He said the government was making money off KiwiSaver at the moment, even when the $521 tax credit for each member was taken into account.

“In the future, the amount made by the government on taxation of KiwiSaver will only increase under its current form. The New Zealand government needs to get serious about encouraging people to prepare adequately for retirement. In order to do that, it needs to give up some of its current revenue, otherwise it will have much larger problems on its hands in the future in attempting to fund New Zealand Superannuation.”

The government could drop the member tax credit.

He said employer contributions should also be increased to 5% and employees’ contributions to 7%, with the provision for employers to reduce employee pay to fund the match.

The public consultation period for the Tax Working Group generated 6700 submissions.

“I would like to thank the New Zealand public for taking part in the process and assure everyone that all submissions will be carefully considered,” said chairman Michael Cullen.

About 16,000 votes were received on the quick polls on the Tax Working Group website.

The unscientific polls revealed the majority of respondents thought the tax system needed major changes to be ready for the future.

The prospect of a capital gains tax topped the chart of important tax issues followed by funding retirement and protecting the environment.

Most KiwiSaver funds reported a negative return for the first three months of this year.

Morningstar has released its latest KiwiSaver survey, for the March quarter.

It shows funds invested in defensive assets outperformed those with a bias to growth.

Morningstar said volatility returned to the markets in the first quarter of 2018 and while New Zealand equities were not immune to global wobbles, they fared better than most.

The NZX50 was down 0.9% to the end of March. The ASX200 fell 7% in New Zealand currency over the same period and the MSCI World Index 2.7%.

Interest rate-sensitive assets, such as listed property and infrastructure, had the biggest losses.

Average multisector category returns ranged from 0.37% over the quarter for the conservative category, through to negative 2.58% for the aggressive funds.

Top performers in their peer groups were Westpac’s default scheme, Westpac’s conservative fund, Westpac’s balanced fund, Milford’s active growth fund and Mercer’s KiwiSaver high growth fund.

On an annual basis, all funds reported a positive return.

Over 10 years, Milford’s active growth fund is a standout performer. It started out with a greater bias to Australasian equities but has become more diversified.

“Asset allocation does move around, and the strong performance has come from a bias to growth assets and exposure to Australasian credit,” Morningstar said.

ANZ retained the largest slice of the KiwiSaver business, with $11.7 billion under management. ASB was second and Westpac third.

Smartshares is launching a new KiwiSaver structure today that allows advisers to set the fee their clients pay for their advice.

Head of funds management Hugh Stevens said there was a lot of discussion in the market about how KiwiSaver advice could be provided to those who wanted it.

He said the old structure of trail commissions and other fees built into the overall amount investors paid made the fund charges more expensive and not well targeted.

“Everyone pays whether they are receiving advice or not. The control is not with the member but with the manager. The adviser and member don’t have much say in how that’s structured.”

He said Smartshares wanted to make its low-cost KiwiSaver scheme available to independent advisers and their clients.

Advisers can access a range of model portfolios or customise their own KiwiSaver solution for their clients, using Superlife’s more than 40 investment options.

The adviser would then agree with their client what was a suitable fee. Smartshares would then deduct the fee from the member’s account and pay it at the end of each month.

“We sign an agreement with each adviser. They agree to undertake ongoing monitoring of the account and provide an opportunity for an annual review of the investment strategy. In return we do all the fee collection.”

Advisers agree to contact their clients at least once a year.

The fee could be set at anything up to 50 basis points or $500 but Stevens said his organisation was willing to work with the Financial Markets Authority and the industry to determine what was reasonable.

There was strong interest in the idea, Stevens said. Although the product officially launched on Tuesday there were already three agreements ready to go by the end of last week.

He said it would be difficult to justify charging for KiwiSaver advice if advisers were only guiding members into a conservative, balanced or growth option, but Smartshares allowed advisers to take a more granular view of members’ needs and piece together the best KiwiSaver solution.

Members could also opt to receive no advice and pay no advice fee.

KiwiSaver investors will soon see the fees they pay displayed in dollar terms – but advisers are not convinced it will have any effect.

From April 1, fees will have to be made clearer.

If a customer has a balance of $10,000 in their KiwiSaver account, until now they might have seen the fund manager’s fee expressed as 1.28%. That will now be spelled out as $128 per year. According to the KiwiSaver Fund Finder tool on the Sorted website, total fees on $10,000 in a balanced fund range from $52 to $174 per year.

Adviser Stephen O’Connor said that would make fees stand out more to investors.

But he said few people were interested specifically in what their KiwiSaver manager was charging them. They were more interested in the overall return.

“Provided the return is reasonable, given the market, they’re not too worried about the fee.”

Another adviser, Simon Hassan, agreed it was usually the outcome that mattered.

He made fees clear to clients and explained what they could expect to get in return.

David Beattie, chief investment officer of Booster, said the change would be challenging, from a perception perspective.

Booster’s fee includes a component to cover the cost of personalised advice for each client.

“Consumers struggle to ascribe a value to that.”

He said the recent long run of strong market returns made it harder for pricier active managers to outperform. But when markets turned, they could be expected to show the benefits of their approach.

Having fees expressed as a dollar figure would lead people to think they were more significant than they were, he said.

Some investors had a mistaken belief that everything in the investment world could be commoditised.

Beattie said fund comparison tools already in the market put an emphasis on fees because other factors were harder to put a value on.

“Transparency is a good thing but it needs to be contextual.”