KiwiSaver

The Government has missed a chance to improve New Zealanders’ retirement investment outcomes, Morningstar research shows.

Morningstar has released a new report Mind the Gap, which shows the difference in individual investors’ outcomes compared to the asset class as a whole.

It calculates fund returns using asset-weighted calculations as opposed to time-weighted returns and takes into account all monthly inflows and redemptions and their compounding effects over time, as well as measuring the experience of a typical dollar invested.

Over the 10 years ended 2016, the average US investor in diversified equity funds had a 4.36% return, but the average diversified equity fund returned 5.15%. In bonds, the average investor received a 2.99% return, versus 3.72% for the average bond fund.

The report found investors with automatic investment plans did better than their peers with more investment freedom, wherever they were in the world.

Morningstar said that was because people tended to buy and sell at the wrong time.

Director of manager research ratings, Asia-Pacific, Chris Douglas, said the same findings could be expected to apply to New Zealand investors, too.

“For investors in regular contribution super schemes versus open-ended funds, whether they invest when they want to, there is a better experience when you are investing in systematic processes because it’s regular saving and you’re not trying to time the market. It takes all the emotion out of the exercise.”

Douglas took issue with the Government’s decision not to follow the Retirement Commissioner’s suggestion to increase KiwiSaver minimum contribution rates. 

Diane Maxwell wanted the minimum employer and employee contribution rate increased from 3% to 4% and optional levels up to 10% added.

In response, Commerce Minister Jacqui Dean said there was limited evidence this would raise savings rates.

But Douglas disagreed. He said it would have been a good first step and was a missed opportunity to give investors protection from the behavioural factors that blunted returns.

Beyond that, he said people should choose an investment strategy and follow it in a disciplined way, without getting caught up in short-term market movements.

Another report analysed the transaction behaviour and investment outcomes of a million Australian Sunsuper members between 2012 and 2016.

Members in the default Sunsuper lifecycle investment option had returns of about 8.3%.

There was a much wider range of returns in the funds invested in diversified balanced strategies and self-directed investments.

In the self-directed group, in which members choose up to 10 individual options from a list of 21 diversified and single-class options, the best return over the period was 8.4%.

Downside returns for the lifecycle group were 8.1% but dropped to 5.9% and 5.1%, respectively, for the diversified balanced and self-directed options.

Paul Murphy, senior manager superannuation policy at Vanguard Australia, told Morningstar the findings were a bit surprising but a strong endorsement of the default strategy and choice architecture of the MySuper framework.

He said very few people had extreme allocations such as 100% cash or 100% equities. “This contrasts with the findings in the latest iteration of the US study, where around 6% held concentrated asset exposures–though this has been trending down significantly, falling from 20% over the last decade.”

 

 

KiwiSaver members who received engaging communication about making a fund choice are more likley to switch out of default funds, new research has found.

The FMA has reported on its work with Kiwi Wealth, which was designed to determine whether behavioural prompts increased the number of active fund choices members made.

New Zealand’s nine default KiwiSaver providers each have an obligation to help their members make an active choice about the best type of fund to suit their savings goals.

The FMA’s KiwiSaver report in 2016 reported on the success of these efforts. It showed most default KiwiSaver members were not choosing their own fund.

While one provider achieved 22% of members making a fund choice, the others ranged from 1% to 8%. Most providers were clustered around 3% to 4%. “We want this number to increase and believe providers can do more to encourage their members,” the FMA said.

As part of the research project, Kiwi Wealth’s “welcome” communication was amended to make it easy to follow, with prompts and links in the email version, attractive and timely.

In total, 3427 new default KiwiSaver members received the welcome communication.

Members were randomly assigned so that half received the original communication (the control) and half the revised communication (the treatment). Members who had an email address received the communication by email. The others received it by letter.

The probability of those who received the reviewed communication making an active choice was 47% higher than those who received the control.

Results from the full model analysis show people who received the treatment communication were more likely to choose their own fund than those in the control group regardless of whether an email or letter was issued. Overall, however, people who received a treatment email were more likely to choose their own fund than the treatment group who received letters, FMA said.

The Kiwi Wealth team will continue using the treatment communication for all new default members because of the success they experienced.

They are now reviewing all of their existing communications to identify opportunities where using this approach could add value. “We would like other KiwiSaver providers to make similar changes to their communications. The approach can be adopted across any member communications and the changes are quick and low cost,” FMA said.

“Providers who currently call members tell us that up to half of the people they reach end up choosing their own fund. However, many providers are not resourced to do this and often they do not have up-to-date contact details. We are keen to explore other more cost-effective ways of following up with members.”

Paul Gregory, FMA director of capability said, “The FMA encourages both KiwiSaver and Managed Investment Scheme providers to use these results. Making similarly simple and effective changes can help investors make better decisions. While the number of people switching in the trial is small, the result is statistically significant and could have a bigger impact if more broadly adopted.”

Joe Bishop, Kiwi Wealth general manager customer, product and innovation, said the onus was on providers to better help KiwiSavers in default funds to actively choose investment options that best suited their needs.

“It’s that first contact that’s the key. By keeping things easy and understandable, we’re able to help members become more than simple savers – they become investors who are planning for, and maximising, their financial futures.”

A second trial using behavioural insights is currently under way with ANZ. The FMA is keen to work with other providers on similar projects.

The Government is cautiously supportive of including higher KiwiSaver contribution rate options and “increasing KiwiSaver coverage” but cannot say yet what that might mean.

Commerce and Consumer Affairs Minister Jacqui Dean has released the Government’s response to the Retirement Commissioner, Diane Maxwell’s, review of retirement income policies.

Maxwell made a range of recommendations as part of her three-yearly review, to improve New Zealanders’ retirement outcomes.

“Earlier this year the Government announced key changes to superannuation settings which are in line with the Commissioner’s recommendation,” Dean said.

“The review also addressed other key areas including KiwiSaver settings, the ageing workforce, and assistance to vulnerable groups in retirement.”

She said the Government was committed to raising levels of financial capability to help more New Zealanders have financial security in retirement.

It has already moved on Diane Maxwell’s suggestion that the age of eligibility for NZ Super be increased to 67, and increasing the length of residence required from 10 years to 25.

It has also announced its intention to decouple KiwiSaver from the age of eligibility for super, will allow people over 65 to join and is requiring KiwiSaver providers to disclose the total dollar cost of all fees in their annual statements, as well as requiring them to indicate the eventual balance a member is on track to achieve.

But while it is not proposing to follow Maxwell’s suggestion to increase the minimum employer and employee contribution rate from 3% to 4%, Dean said the Government supported increasing the range of contribution rates. Maxwell had suggested 6% and 10% as options.

Dean said it was also undertaking work to understand why members were not contributing.  It was supportive of the recommendation to increase KiwiSaver coverage. She said more work was needed to assess the impact of and options for introducing additional ways for members to contribute. There have been suggestions that KiwiSaver should be made compulsory.

Dean said more work was needed to consider the compliance costs for employers and the administrative impacts for Inland Revenue before the Government could commit to the change.

It would not remove the non-qualifying partner option or the direct deductions policy for overseas state pensions.

Dean said the Government agreed that as KiwiSaver balances and demand increased, it was likely that KiwiSaver providers would innovate and offer more drawdown options for members.

More than 50,000 of ANZ’s KiwiSaver members will receive an additional member tax credit due to processing errors amounting to about $2 million.

ANZ is making a claim on behalf of impacted KiwiSaver members to Inland Revenue for the additional member tax credits to be credited to those customers’ KiwiSaver accounts.

Those affected are people who have been members since 2009.

In addition, ANZ will credit their KiwiSaver accounts with the investment returns that would put them in at least the same position they would have been if the error had not occurred. ANZ expects payments to be completed in August.

While ANZ has identified 51,000 customers who are financially impacted by the error, the bank said exact numbers and amounts would not be known until the correction had been processed by Inland Revenue.

For most of those impacted members the underpaid amounts are expected to be $50 or less.