KiwiSaver

A new bill hopes to address low contribution rates in the retirement savings scheme.

The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill has been introduced to Parliament, introducing enhancements to KiwiSaver in line with the Retirement Commissioner’s December 2016 review of retirement income policy.

Among the changes it would introduce is a move to allow people over 65 to join the scheme, to give them access to KiwiSaver as a provider of low-cost managed funds through retirement.

It would also remove the lock-in period that requires people over 65 to stay in for five years before they withdraw their money.

Both changes would come into force next July if the bill is passed.

At the moment people over 65 cannot join KiwiSaver or move to a new scheme, although they can continue to contribute to their accounts if they are already a member.

People who want to withdraw their money have to wait – a rule that was designed to stop them joining simply for the $1000 kickstart, which has since been removed.

Other changes, which the bill would bring into force in April, include new contribution rates of 6% and 1%, reducing the maximum contributions holiday that people can take from the scheme to one year, and renaming that holiday a “savings suspension”.

In its regulatory impact assessment, Inland Revenue said the changes should address low contribution rates and long contribution holidays being taken by KiwiSaver members.

In the year ended June 31, 2017, 131,710 members were on a contributions holiday. Almost 85% were for five years.

“Stopping contributions for five years has a significant impact on members’ savings, and also means members generally do not receive the member tax credit or employer contributions during this period,” Inland Revenue said.

“The purpose of the contributions holiday is to ensure members can take a break from making contributions when they are not in a financial position to do so. However, having a default five year contributions holiday period is likely to be longer than necessary for many members (whose financial position is likely to improve in the interim period).”

It said the new contribution rates should help savings rates and give more flexibility for members.

“The additional 6% rate would also address the gap between the current 4% and 8% contribution rates, which the Review indicated many members think is too large. This view is supported by the fact that 24% of members contribute at the 4% rate, but only 9% of members contribute at the 8% rate.”

 

Investors who work with advisers are on track to achieve better outcomes in their KiwiSaver accounts.

Data from ANZ and Booster shows that KiwiSaver members who work with advisers have more allocation to growth assets.

At Booster, investors aged between 17 and 32 have 30% higher exposure to growth assets, which chief investment officer David Beattie said was due in part to the effect of unadvised default members ending up in conservative funds.

But even between age 33 and 60, members with an adviser had 15% allocation to growth.

“The risk profile of average advised members from 40 to 65 becomes more risk averse as they get older, which is what you would expect,” Beattie said.

“However, the average unadvised member’s risk profiles for 40 to 65 is not changing and in fact strangely spikes up at the end.”

He said the flat average risk profiles of advised members aged 15-35 would be more aggressive and more downward sloping were it not for first-home withdrawals. 

“That supports the hypothesis that they are being advised well.”

At ANZ, general manager of wealth products Ana-Marie Lockyer said, when default clients and those in lifetimes funds were taken out of the mix, the data showed that there was a higher bias to growth funds, either diversified or single sector, in the One Answer KiwiSaver fund for members with advisers.

“That seems to be prevalent at all age groups except 26 to 35 when they are more likely not to have  a bias to growth because they tend to be saving for a first home.”

The biggest difference was in people aged over 46, she said.

Over an investor’s lifetime, more exposure to growth assets should lead to better outcomes.

Beattie said there was still not strong demand for KiwiSaver advice. Booster has now sent out two years of statements with a forecast lump sum and indication of the retirement income that could be expected.

“We through that might be a catalyst for clients with advisers to contact their advisers and ask ‘what can I do to lift that’ but there has not been a lot of engagement, It’s not quite at the forefront of their minds.”

He said it might not e until average balances hit about $30,000 that people became more concerned.

Chris Douglas, director of manager rating research at Morningstar Asia-Pacific said advisers could also be expected to help clients stay the course when markets were shaky, boosting their returns.

Commission should be banned for financial advisers offering advice on KiwiSaver, Milford Asset Management chief executive Troy Swann has told an even in Auckland.

The Commission for Financial Capability this week held its annual summit.

A panel was asked for views on how KiwiSaver should be changed, as it goes into its second decade of existence.

Commission investor education group manager David Boyle said the lack of contribution, general low balances, and the conservative investment profile of many investors, were a major problem for the scheme, despite the large number of people who had joined.

Swann said, among other changes, there should be no commission paid on advice for KiwiSaver in future.

It altered recommendations advisers gave, he said, and was not good for the country.

Milford does not pay commission to advisers for KiwiSaver.

But Liam Mason, head of regulation at the Financial Markets Authority, said financial advice had a key part to play in KiwiSaver.

Members who sought advice and came up with a plan in the years close to retirement had much better rates of achieving their goals, he said.

“If you can get financial advice in the last few years of savings, the outcomes go up dramatically.”

He said New Zealand should be asking “quite a lot of people who get to wear the KiwiSaver badge”. 

Sam Stubbs, founder of Simplicity, which also does not pay commission to advisers, said some providers would experience a shake-up of distribution over the coming years.

“AI is going to decimate traditional distribution channels and advice. It’s free and transparent and transparency is not a feature of the financial services industry. That will happen fairly quickly.”

AI would draw on publicly available information to provide simple personalised advice within 12 or 18 months, he said.

“We’ve said we’re doing to do it, produce an product-agnostic, open-source platform that’s free to everyone. That’s the way that advice gets into the hands of people who can’t afford to get advice.”

Providers who created good products that helped people would do well, he said. But moat-based businesses that relied on distribution channels would face a serious challenge from technology.

New Zealand’s financial advice sector is cautiously optimistic about plans for KiwiSaver annual statements to show members what their projected balances could produce in income.

Commerce and Consumer Affairs Minister Kris Faafoi is seeking feedback from KiwiSaver providers on the introduction of the new information.

“We want people to have access to clear, easy-to-understand information that shows how their current savings are tracking towards retirement. Statements will show people an estimate of the savings they will have built-up by age 65 and the weekly retirement income that sum would provide over 25 years.

“How quickly these changes can be made to annual statements will be determined as part of the consultation we are undertaking with providers, but it is my expectation the requirements will be introduced without delay.”

Former IFA president and financial adviser Nigel Tate said it was not a bad idea but the industry had seen projections before. “Consumers have been disappointed as a result of over-projected rates, so maybe but only if the rates were an average of a minimum of the past five years’ returns of that client’s scheme.”

Conservative rates would also be needed to gauge the decumulation phase.

IFA chief executive Fred Dodds said it would be a test to see if clients cared, would inquire, how effective providers’ tools were and whether they would use them.

It might also test bank advice staff, he said.

“If the questions are searching, the 350 to 400 AFAs in the banks will be busy.”

He said it would also be interesting to see how many calls non-aligned advisers received because not all KiwiSaver members are with big providers.

“Hopefully the media and commentators concentrate on the ‘his is a good idea’to actually get people thinking about retirement and not charge off into an undoubted criticism of fees.”