KiwiSaver

Savers would be better off in a government-run KiwiSaver scheme, new data suggests.

As part of coalition negotiations in October, the Green Party asked Treasury to do some analysis of the cost to establish and run a default public KiwiSaver fund and the potential savings benefits for average KiwiSaver members at retirement.

A scheme administered by the Guardians of NZ Superannuation was one of the Green Party’s policies this election. NZ First also campaigned on a government-run scheme, KiwiFund. NZ First MP Fletcher Tabuteau’s KiwiFund Bill has been drawn from the member’s ballot but is yet to have its first reading.

Treasury said it would cost between $200,000 and $400,000 to register the scheme, including its disclosure documents and FMA licensing.

The initial design, scoping and analysis phase would cost $1 million, it said, most of which would come from professional advisory frees. “It is possible that such upfront costs could be recovered by the fees charged to fund investors.”

Treasury said removing the requirement to make a profit would allow a reduction in fees compared to current default KiwiSaver providers. It suggested 0.3% plus $30 a year, Simplicity’s structure, was a reasonable benchmark on which to base running costs for a conservative, passive fund.

If a member joined at 18, stayed in the fund until 65 and contributed 3% of the average wage, matched by an employer’s 3%, making no withdrawals, they would have a closing balance in the government-run scheme of $965,783, Treasury said.

That was compared to $912,606 from an investment in existing default KiwiSaver conservative schemes – a difference of $53,176 or 5.5%.

The Financial Services Council said it supported initiatives to build a sustainable financial services sector.

But it was not clear what problem a government-run scheme was trying to solve.

“KiwiSaver providers operate in a competitive marketplace, and are well-regulated and of a high standard,” said chief executive Richard Klipin.

“Consequently, they enjoy a high level of both public and regulator confidence. The existing government framework for default KiwiSaver providers places a high level of accountability over the nine default KiwiSaver providers and has mechanisms for monitoring fees and investment practices. This monitoring framework covers a significant proportion of the KiwiSaver market and protects the NZ consumer.”

The Green Party also asked about the cost of introducing deposit insurance. The International  Monetary Fund suggested this year it would strengthen New Zealand’s financial safety net.

Treasury said it would cost $1.50 to $3.70 per year, per $1000 in deposits, depending on how quickly the fund’s target needed to be reached.

If it wanted the fund at target in 10 years, a depositor with $100,000 in the bank would have to pay $370 a year, assuming all the cost was passed on.  That would result in a fund big enough to cover one bank failing – although it would be liable for the failure of multiple banks.

A Government-run KiwiSaver scheme would have an unfair disadvantage that could push other providers out of business.

The KiwiFund Bill has been drawn from Parliament’s members’ bill ballot. If it’s passed it would put in motion an independent working group to establish a government-run and owned KiwiSaver scheme, KiwiFund.

It’s an idea that NZ First leader Winston Peters first proposed in 2014 and campaigned on again this year.

The working group would advise on how the fund could be set up with a lower, transparent fee structure, keeping profits in New Zealand, giving preferential treatment to New Zealand-based investments and focusing on socially and ethically responsible investment.

KiwiFund would receive a government guarantee.

Banking expert Claire Matthews said that would be a concern to existing providers.

“Why would you be a member of a non-government-guaranteed fund?

“What is the problem that the fund is designed to solve?  If it’s fees, we already have Simplicity operating in the market, and greater disclosure is being introduced to ensure KiwiSaver members are better informed.  In addition, it is a relatively competitive market, although we need to do more to ensure that competition is realised by ensuring members have greater interest in their KiwiSaver account, and therefore give greater consideration to their fund and their provider.”

Sam Stubbs, founder of Simplicity, said the scheme would have to be run passively. “There is simply too much moral hazard in having an active manager looking after individuals’ savings in the name of the Government. The NZ Super Fund is able to do this because it’s not in individual accounts.”

But he said there was a role for projects that married the long-term infrastructure requirements of the Government with long-term investments of KiwiSaver money.

“I’m quite keen on that as both sides win. I think it’s an opportunity we are missing right now as both sides run into their ideological corners on public private partnerships. KiwiSaver money is special in that regard, and the infrastructure requirements going forward will be massive.”

Other providers referred questions to the Financial Services Council, which has been approached for comment.

New Zealanders have missed out on KiwiSaver returns because of their lack of exposure to the local share market, one manager says.

Milford Asset Management executive director Brian Gaynor has rejected calls for KiwiSaver to be made compulsory, saying it would take the competitive onus away from fund managers.

But he said changes were needed. 

Gaynor said, although the NZX had risen strongly every year since 2012, only about 10% of KiwiSaver money was in the local share market, so KiwiSaver members had missed out.

Milford’s active growth KiwiSaver scheme usually has about 75% of its funds invested in Australasian equities. Its conservative and balanced funds can have up to 20% and 40%, respectively.

But Gaynor said the New Zealand market was too small and did not offer the investment opportunities people wanted.

“It doesn’t have financial services companies, except for Heartland Bank, whereas in Australia, the big four banks are all worth more than the total value of the New Zealand share market, so the NZX doesn’t have the opportunities for KiwiSaver investors.”

Instead, KiwiSaver money was going offshore, into cash and bonds, he said. The foundation of KiwiSaver was based on a defensive asset allocation.

“I’d also like to see more KiwiSaver funds invested into equities rather than into defensive assets like cash and bonds. Default schemes are some of it but even non-default schemes are even a bit conservative, too.”

Gaynor said he did not agree with a recent focus on fees. In a New Zealand market, fees were not such an important consideration, he said. “We’re quite different to the United States.”

The top-performing funds were those with average or slightly above average fees, he said. “New Zealand KiwiSaver funds are multiassets, they’re much more complex than the type of funds where lower fees mean a difference over a period of time.”

Michael Cullen chairing the new government’s tax working group could be a boon to the KiwiSaver industry, it has been predicted.

Cullen, the architect of the retirement savings scheme, will head up the group which will have  “wide mandate” to look at New Zealand’s whole tax system. It has specifically been tasked with looking at GST and potential measures to slow growth in house prices.

But KiwiSaver providers said the scheme could get some attention, too. Changes to the tax regime could make the scheme significantly more appealing, for example, if deductions were exempt from tax or other concessions were put in place.

In Australia, deductions made before tax are taxed at a rate of 15 per cent. Deductions made from after-tax income are not taxed.

There has previously been criticism that long-term New Zealand savers in managed funds are at a tax disadvantage.

The FSC put out a report in 2013 that said: “No other country has out combination of comprehensive taxation on the return on debt instruments as they accrue, no superannuation tax concessions, no tax on capital gains on rental properties, and the unconstrained deductibility of the nominal value of interest against other income on debt used to purchase rental property.”

A decision around the KiwiSaver scheme was withheld from one of the briefings to incoming ministers made public last week.

A description of the decision, in a document for Commerce and Consumer Affairs Minister Kris Faafoi, was withheld under the Official Information Act. It was reported that, according to the State Services Commission the rule is applied where there is concern that the release of the draft advice would interfere with the ability of a decision-maker to consider the advice tendered.

Sources speculated that could be related to KiwiSaver coming under the remit of the working group – although most providers spoken to said they were in the dark, as well.

Finance Minister Grant Robertson has already indicated that Labour wants to increase the minimum regular KiwiSaver contribution rate from 3% to 4.5%, and make the scheme universal – although there would still be significant exclusions, including for students, beneficiaries and self-employed people.