KiwiSaver

When is a ‘balanced’ fund not a balanced fund? When it takes the risk of a growth fund, one researcher says.

AUT professor of finance Bart Frijns wrote a research paper in which he said the way KiwiSaver funds’ risk levels were described could be misleading.

“When you look at the risk profile of a ‘balanced’ fund, there was a very large dispersion in the risk profile that those funds have. Some balanced funds turned out to be more risky than growth funds,” he said.

“This different level of risk exposure by funds indicates that in the long-run investors in such funds could end up with significant differences in the values of their final portfolio endowment.”

He said it required more transparency from KiwiSaver providers.

When a fund said it was a particular style of investment, investors needed to be able to look at the risk profile and see how it could be expected to perform. 

“Some detailed classification or risk scale would be really helpful for people. There are very easy ways to measure these things. But it’s something a normal investor doesn’t readily understand. Some standards need to be set.”

Providers are now required to use risk indicators in their reporting to clients but these have been criticised because they are based on volatility experienced over the previous five years.

Tim Murphy, Morningstar director of manager research, said his firm categorised funds according to their asset allocation, not what they were called.

But he said it was not common for funds to end up in a different category.

Nikko, ANZ, Booster and OneAnswer all have balanced or balanced growth funds that end up in Morningstar’s growth category.

Booster, Generate, Fisher Funds, Kiwi Wealth and Mercer all have growth funds that Morningstar categorises as aggressive.

“It’s a bigger issue in Australia,” Murphy said.

He said Morningstar would consider a growth fund one that had between 60% and 80% growth assets. But over time a 60% growth fund would be expected to have a different outcome to an 80% one.

David Boyle, group manager of investor education at the Commission for Financial Capability, said it was a function of New Zealand having a smaller investment market.

“There is a challenge around making sure everyone is true to label. Part of that is because of the number of funds in the market.”

It should be expected that would change over time, he said. “It’s worth noting and being aware of.”

Richard James, chief executive of NZ Funds, said he did not see an issue. “The rules around fund names and descriptors and the risk indicators are pretty robust.”

Advice is important to make sure New Zealanders get the most out of KiwiSaver, the country’s biggest provider says – but it suggests much of it should be supplied free.

ANZ has released a survey and whitepaper to mark the 10th anniversary of the retirement savings scheme.

It called for the scheme to be made compulsory, for providers to be required to offer free savings advice to members and help for those in the decumulation phase.

It said the need for advice was apparent in the results of a survey of 1000 people,  which showed most had not even worked out how much they were likely to have saved by 65. More than 20% said that was because it was too difficult to do so.

The survey found 28% of respondents said it was best for KiwiSaver funds to be made available as a lump sum at 65. Another 19% thought it was best in installments. More than 40% said a combination would be best.

Almost 30% said they wanted their KiwiSaver provider to give them a set of regular withdrawal options to choose from at retirement, but 62% wanted access to free professional advice.

ANZ said roboadvice would play a bigger part in future advice for KiwiSaver members.

A third of respondents would prefer to get retirement savings advice from a person and 31% said they would use a sophisticated online calculator, either alone or with someone helping them. Just under 20% said they would prefer just online tools and 16% wanted a DIY approach.

Members with little knowledge about KiwiSaver were more likely to want advice from a person, at 47%.

ANZ said the government should also provide some guidance around assumptions and parameters regarding roboadvice to make sure there was consistency in the provision of mass-scale advice.

“At ANZ, we offer free financial advice to ensure members can continue to benefit from exposure to markets, with the right risk profile for their retirement circumstances,” ANZ said.

“We also promote use of the regular withdrawal option to discourage people from impulse buys or reallocating their money to misguided investments. While this is a good first step, there’s still plenty more the government and financial services industry can do to help educate New Zealand’s ageing population on how best to decumulate to achieve a comfortable retirement lifestyle.”

ANZ recommended that KiwiSaver providers be required to check in with members a year after they withdrew money for a first home and encourage them to seek advice. 

It said providers should also encourage female members to get personalised advice.

“The government and financial services industry should work together to enhance the financial capability of New Zealanders receiving NZ Super. This could be in the form of a comprehensive information pack that accompanies SuperGold cards, with directories on where to access financial advice, and a range of investment and decumulation options available to them.”

 

New research from Inland Revenue shows many KiwiSaver members don’t understand how the tax credit works, or what it is.

The Commission for Financial Capability is calling for action from providers to ensure that more people in KiwiSaver receive one of its main benefits: the $521 member tax credit (MTC) paid to members by the government.

The research found that almost half of KiwiSaver members had not heard of the term “member tax credit”. When it was explained to them, 25% were still none the wiser.

People were even unclear about their own funds: Of those who knew about MTCs, some thought they hadn’t received any money when they had. Some thought they had been paid the full amount of $521 when they hadn’t.

The Commission’s education manager David Boyle said: “There’s clearly a lot of confusion, which is frustrating given that KiwiSaver has been with us for ten years. There’s been plenty of time to address this growing issue. 

“Some KiwiSaver providers have told us that the barrier is affordability. Inland Revenue has surveyed a broad range of members to improve understanding about what was stopping them getting some or all of their MTC and to test the affordability theory.

“The research shows that while it was part of the issue, there were other reasons why people missed out. Many said they would have saved in KiwiSaver if they had known about the MTC and they expected their providers to communicate more clearly.”

Last year 1.1 million members missed out on the full MTC. Of that number 580,000 received nothing at all which means they didn’t save anything.

Almost 40% of people who didn’t get the full MTC said they weren’t on a salary or wage and simply forgot to set up a payment.

Boyle said: “It’s disappointing that Kiwis are missing out on money which could help them in the future when they decide to stop work finally.

“It’s the best-known return anyone is going to get on their savings. Simply put, those who are eligible are getting a 50% return on every dollar up to $1043 a year. 

“But once that year goes by, you can’t go back and claim it later. That’s why it is so important to act now and make sure you don’t miss out next year. 

“We had always suspected that awareness was an issue. This research confirms that’s the case and we would encourage providers to do more to get the message out about MTCs.

“It’s worth acknowledging that some are making it a greater priority than others. More action in this area is a win/win for both providers and members.

“At the Commission we will be looking at our own messaging on this topic, and continue to explore what we can do to help reduce this lost opportunity.”

The research came from a survey of 1800 people by Inland Revenue.

New product disclosure statements that were meant to be easier to understand still contain a large number of specialist financial terms, researchers say.

Research by associate professor Aaron Gilbert and Ayesha Scott at AUT Business School Department of Finance has shown, on average, KiwiSaver PDS documents delivered under the new Financial Markets Conduct Act framework are significantly shorter and contain simpler language when compared with the prospectuses and investment statements they replaced.

But even the simplified product disclosure statements require a high level of literacy. People would need to know and understand about 100 finance-related terms.

“On average, simplified disclosure has made these documents easier to understand for our average New Zealander who is thinking about or invested in KiwiSaver,” Scott said.

Gilbert said, given the uncertainty around the future of national superannuation, KiwiSaver would become a major component of people’s financial future.

“Because it is so important and because small decisions made today can have a huge impact 30 or 40 years from now in terms of how much money people have to retire on, it’s really important people are making good decisions when it comes to their KiwiSaver.

“The first step in making those good decisions is to get people actively seeking information.”

Gilbert and Scott compared the last prospectus produced by 21 KiwiSaver providers with their new simplified disclosure documents to provide a before and after snapshot of the effect of the regulation.

A number of measures were used to evaluate the readability of the documents including the complexity of the language used compared to common, everyday plain English words and the number of specialist financial terms included.

The researchers will now ask people to read the documents to work out whether they could get the information they needed from them.