KiwiSaver

Former deputy prime minister and finance minister Sir Michael Cullen says the need for an annuity provider to help KiwiSaver members manage their lump sums on retirement is another sign of the scheme’s success.

He recently joined the board of the Retirement Income Group (RIG).

RIG manages New Zealand’s only variable annuity, Lifetime Retirement Income.

Sir Michael said annuity providers had not made much cut-through in New Zealand and the products that had been available to New Zealanders were not seen as attractive.

But he said as the KiwiSaver balances built up it raised issues about what options would be available to members at retirement. “Being capital rich in retirement is not much use if you are not able to live off it,” he said.

He said Lifetime seemed to offer a viable option for the long-term.

Sir Michael said, when KiwiSaver was first developed, it had not been predicted that such large numbers of New Zealanders would join.

“The success of KiwiSaver has made these second or third-order issues more important. [Another is] are we bringing fees down quickly enough.”

New Zealand was well positioned for an income product, he said.

He said Australia was pondering the problem of a retirement benefit that was heavily income and asset-tested and a compulsory savings scheme had was lump sum orientated, which gave people the incentive to blow their lump sums so they could qualify for the pension.

“New Zealand Super is not asset tested so we don’t face that incentive for misaligned behaviour,” he said.

KiwiSaver was not the only scheme that was likely to deliver lump sums that would need to be manged, he said.

People who had joined the Government Superannuation Fund in the 1980s would start to retire over the next decades and could need help managing that money, he said.

Sir Michael said Lifetime was a good option because people who withdrew their money early could still access any remaining capital without penalty, and a guarantee would cover longevity risk.

KiwiSaver provider Simplicity’s managing director Sam Stubbs says his funds’ first reported performance data are like “winning a bronze medal in your first event” despite a poor showing from its conservative fund.

Morningstar has released its KiwiSaver survey for the December quarter.

Kiwi Wealth’s growth fund was a standout performer, thanks in part to its allocation to international assets.

But the new, low-fee market entrant also had an early win. It was the best performing growth fund in the quarter, returning 1.9% after fees and before tax.

The Kiwi Wealth KiwiSaver Growth, which Morningstar classifies as a multi-sector aggressive fund, returned 4.35% over the same period.

Stubbs said the result should surprise some of Simplicity’s actively managed competitors.

“They are supposed to outperform the market and index tracking funds like ours, by picking winners. In most cases this hasn’t happened. This is particularly embarrassing in the last quarter, when there was lots of volatility, and markets that should be favourable to stock pickers.”

Melville Jessup Weaver also produced data, which put Simplicity in the middle of the pack for balanced funds, second-worst – to Fisher Funds – among the conservative and third-highest among the growth funds.

MJW has a bigger group of funds in its growth classification than Morningstar’s and ranks Kiwi Wealth in the same category.

Stubbs said the growth fund was Simplicity’s “flagship” product, and 75% of its members were in it.

He said the poor performance of bonds had dragged down the conservative fund.

“Overall the business is going very well. After five months we have over 3200 members, $85,000,000 funds under management, are saving members $750,000 in fees annually, and are donating $35,000 to charity.”

Over the five years to the end of 2016, Morningstar found ANZ OneAnswer KiwiSaver Growth, Milford KiwiSaver Balanced, and Aon Russell Lifepoints had been the top-performing options in their respective categories.
 

Government is making it easier for earthquake-affected KiwiSaver members to withdraw their money if they suffer financial hardship – but one adviser is warning it is not a good idea.

Commerce Minister Paul Goldsmith announced this week that he had asked KiwiSaver scheme supervisors to expedite requests for early withdrawals for earthquake-affected people.

“I also emphasised to KiwiSaver supervisors that when assessing financial hardship applications, they should take into account the effects of the earthquake on their member’s assets, ability to work, income and expenses,” he said.

“Supervisors have agreed to this approach. They will work with KiwiSaver providers to ensure affected members can go through the withdrawal process as quickly and flexibly as possible.”

Financial adviser Hannah McQueen said the idea was dangerous.

“The Government needs to support the earthquake victims and regions with some kind of package from the Government,” she said.

“The reality is that a lot of these victims might not even qualify for a pension in the future because there will not be enough money to give a pension. 

“I think it would be inappropriate for the Government to say that people can access their KiwiSaver and screw up their retirement, without also saying that the pension entitlement needs to be addressed to reflect the fact we are living longer than ever before, which means that either the entitlement will drop, cease or be delayed.  Perhaps this will fast-track a long overdue conversation around our country and where it is going financially.  There is not an unlimited source of money.”

She said there was a bigger problem to confront, in that many New Zealanders were under-prepared for anything unexpected.

“We get bailed out in the wrong way, time and time again and the lessons that should be learned, don’t get learned and we continue to be allowed to be apathetic around money.”

She said anyone in KiwiSaver could already access their funds in cases of true hardship.

“The definition of hardship is tight, and it needs to be.  By default, some of the victims of this earthquake will eventually qualify for this,” she said.

“We are trying to change the way that Kiwis deal with money, see money, plan for life and retirement.  Currently there is too little connection between life’s choices and the financial impact.  Everyone will get a mack truck event at some point and everyone needs to be prepared for this.  And when it hits, work out the best way to move past it, to ensure you can still have the financial future you want.”

Bank KiwiSaver providers are worried that proposed changes to annual statement requirements could lead to members chasing the lowest-fee providers.

The Ministry of Business, Innovation and Employment sought submissions on potential changes to the annual statement rules for KiwiSaver, including requirements that providers show members what income their accounts are on track to deliver in retirement, the amount of fees they have paid each year in dollar terms, and a prompter to seek help on getting more from KiwiSaver.

The Bankers Association said it would be possible by next year to produce statements showing members’ current balance, the total amount the account grew by over the year, transactions through the year and an encouragement for investors to seek help on increasing the money they had available at retirement.

But the other changes proposed would take longer.

It said providers would have a number of issues to address if they were required to calculate each member’s projected retirement balance and income.

“This is because a number of detailed and technical assumptions need to be worked through to achieve accuracy, consistency and comparability of this information for consumers. Without guidance on this issue, or sufficient time to test and implement the Retirement Income calculation, these projections are likely to be misleading and confusing.”

The submission said this requirement could be brought in, in 2018.

NZBA said two of the six bank KiwiSaver providers who are its members are in a position to disclose fees in their statements, and already do.

But it said for others, it would be difficult.

“The calculation of these fees is complex, as percentage-based fund charges are calculated at fund rather than investor level, and it is therefore not a case of summing transactions per investor. Calculation logic also needs to be applied to each investor taking into account considerable complexities such as multiple funds held by each investor, potential switching between funds and total fees changing during the period.

“Regulations will need to be developed so that all of these complexities are taken into account and all providers are calculating total fees paid on the same basis, which importantly ensures customers are receiving consistent information that is comparable across industry.”

But the NZBA said it did not support highlighting fees in the way MBIE suggested, with a “total fees” circle on annual statements.

“In NZBA’s view this places a disproportionate emphasis on fees over performance. Whilst fees are an important factor in retirement outcomes, ultimately net performance is more important.

“Fees are one element of the overall retirement investment and in many instances reflect active/passive fund management. In an actively managed portfolio, higher fees are appropriate, as they reflect the work undertaken by the provider. All fees should be considered in light of the total return, so that the member can form their own view about the fee in light of the service they have received and returns their fund has made.”

NZBA said if fees were given such weight, it could drive a culture where KiwiSaver members chased low fees at the expense of optimal savings growth.