KiwiSaver

The Government should think about offering other tax-advantaged investment vehicles if it wants to break New Zealanders’ focus on residential property, says Rebecca Thomas, chief executive of Mint Asset Management.

She said it was currently a hard sell to promote managed funds, when it was KiwiSaver stacked with incentives.

Data from Milford shows that over the scheme’s first 10 years, savers invested $17 billion of their own money but received another $10b in employer contributions, $8b government contributions and $11b of investment returns.

Having another tax-advantaged scheme would encourage saving and boost the local funds management industry, Thomas said.

She pointed to Britain’s PEPs and ISAs, which she said had helped to significantly boost retirement incomes as well as provide people with the means to save for other things, such as a house deposit.

There, savers are allowed to put away income on which tax has already been paid, up to a maximum cap, and pay no tax on its growth.

It would also be a better option than KiwiSaver for those saving for a first house. 

“With KiwiSaver it’s a very mismatched concept, having the ability to withdraw for a house purchase when KiwiSaver is designed to be a locked-in scheme. That should be untouched and just grows over time.

“I spoke to the new minister of commerce about this before Christmas. The success of KiwiSaver paves the way for looking at non-locked in investment scheme,” she said.

“Investment in in non-KiwiSaver managed funds has been helped by the growth of KiwiSaver but there is a long way to go before other financial savings become meaningful. The benefits to investors, though, are the availability of liquid investments they can realise as needed or retained as a more flexible addition to retirement savings.”

Mint recently took over the contract to manage BNZ’s KiwiSaver investments, from Harbour and Devon. That will happen from March. It is Mint’s second KiwiSaver client, after AMP.

Milford Asset Managemtn chief executive Troy Swann said the KiwiSaver scheme’s incentives did attract working-age investors.

“But for many people, saving only 3% of their salary in a KiwiSaver fund likely won’t be enough to fund a comfortable retirement. Therefore, people should also be saving and investing outside of KiwiSaver if they can afford to. For example, at Milford we have KiwiSaver Funds, PIE Investment Funds and our Private Wealth service, and many of our KiwiSaver clients invest their additional savings in our PIE Investment Funds and our Private Wealth service.”

 

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.”