KiwiSaver

A one-off enrolment of all salary and wage-earners who are not KiwiSaver members would likely cost more than it would deliver in benefits, a Treasury report says.

The report, prepared for Finance Minister Bill English last year, has been released under the Official Information Act.

The Government has previously said it intended to carry out a one-off enrolment day once it returned to fiscal surplus.

People would be given the opportunity to opt out if they did not want to be automatically enrolled.

It was designed to tackle the problem of people who had not got around to signing up to KiwiSaver.

Last year’s removal of the $1000 kickstart incentive for all new KiwiSaver members made the move a  cheaper one to implement.

But Treasury said the case for one-off enrolment was diminishing as time went on and more and more of those who would be captured by the exercise enrolled any way.

“Weighed up against the costs, the benefits for national saving and individuals’ saving of a one-off exercise are minimal.”

Analysis by the Treasury and Inland Revenue in 2011 found that one-off enrolment would increase membership by around 330,000 individuals and thereby boost the 1.6 million membership by 20%.

But since 2011, the rate of enrolment into KiwiSaver has been high and exceeded officials’ expectations. The total membership is now 2.5 million and 1.4 million of them are  salary and wage earners.

A one-off enrolment exercise would only boost membership by 5% to 7%, the report said.

The economic costs of a one-off enrolment exercise amount to $4 million for implementation; $10.4 million, being the 20% deadweight cost for four years of subsidies (for a 1 July 2016 exercise); and unspecified costs on individuals, employers and KiwiSaver providers which could be minimised in the scheme design.

But it said the exercise could have benefits if it was part of a wider campaign to raise awareness of the scheme, which could prompt members to consider their fund choice and engage the large number of people who do not make enough contributions each year to receive the member tax credit.

It wants groups working together including the Commission for Financial Capability, Ministry of Business Innovation and Employment (MBIE), the Financial Markets Authority and Inland Revenue to develop a KiwiSaver awareness strategy.

KiwiSaver members should not be allowed to “set and forget” a five-year contributions holiday, providers and industry commentators say.

Members can choose to opt out of their contributions for five years at a time. At the end of that period, they are asked whether they want to roll over on to another contribution holiday. If they do not respond, contributions automatically restart.

Therese Singleton, general manager of investments and insurance at AMP, said one of the things she would most like to change about the retirement savings scheme was the length of that contributions holiday.

She said people needed to realise the value of continuing contributions.

“The tax credit in itself is more of a return than you’re ever going to get on $1000 anywhere else and that in itself is reason enough to contribute,” she said.

David Boyle, group manager of investor education at the Commission for Financial Capability, agreed. He said people would forget they were not contributing.

“At the minimum they should get a letter each year telling them the impact of not having contributed over the year.”

Claire  Matthews, of Massey University, said people should look at their KiwiSaver accounts annually to determine whether the settings were still right for their circumstances.

She said it would make sense for those on a contributions holiday to be contacted every year to be asked whether they wanted that to continue.

ANZ general manager products and marketing Ana-Marie Lockyer supported a one-year holiday limit.

She knew of cases where people had got to the end of their five-year holiday and been surprised to find they had not been contributing. They had then wanted to contribute more to catch up.

“They probably would have preferred a reminder earlier.”

But she said her only concern was that further changes to KiwiSaver might make people more hesitant to sign up at all.

“A reason a lot of people don’t join KiwiSaver is because of the constant changing. I support the idea but the time has to be right and it has to be rolled out in the right manner.”

Aggressive and growth funds are likely to continue to top the KiwiSaver performance tables through 2016, an analyst says.

On a three-year annualised basis, aggressive and growth funds have been the clear standouts, returning 11.9% and 11.5% respectively according to research house Morningstar. That is well ahead of balanced funds’ average 9.7%, moderate funds’ 7.3% and default funds’ 6.2%.

Morningstar analyst Kathryn Young said there was unlikely to be any major upset for KiwiSaver investors through 2016.

She said “muted” was likely the best way to describe this year’s predicted performance. New Zealand equities’ long run of double-digit returns was unlikely to continue, she said.

“There have been really strong returns on a lot of asset classes over the past five years and valuations are at a place where they are vulnerable to shocks, as we’ve seen in global equities.”

But she said she was not expecting major equity market losses. 

Young said KiwiSaver funds were well diversified, with reasonable asset allocation that would make them able to weather market environments such as the current one well. “We’re not worried about the structure of the KiwiSaver managers we cover.”

Not having a lot of exposure to emerging markets had helped KiwiSaver returns over recent months, she said. “That’s where a lot of the pain has been in the past year and could be in the coming year.”

Of the managers Morningstar researches, only AMP and Mercer have emerging market shares int heir strategic asset allocation.

“KiwiSaver is a bit insulated from that and that’s probably a good thing going into the year,” she said.

Morningstar was not predicting any major changes in KiwiSaver market share, either.

Young said she expected banks to continue to dominate.

Market turbulence was unlikely to prompt members to move to more conservative investments in great numbers, she said, partly because many were already invested more conservatively than was the norm internationally and partly because many were not engaged enough with their KiwISaver accounts to do so.

She said she did not expect aggressive and growth funds to stop being the best performers because there is no equity market collapse predicted, and fixed interest is also expected to deliver muted returns.

Many KiwiSaver members do not feel they have enough money in their accounts to make seeking advice worthwhile, even if the service is free, one provider says.

Grosvenor is a new default provider of the saving scheme.

As part of its service to clients, it offers them access to an adviser.

Each new member who defaults in is contacted and asked if they would like personalised KiwiSaver advice.

Chief investment officer David Beattie said, so far, only about a quarter were willing. 

“They say no, they don’t need one, they think they don’t have the money or they are embarrassed to rock up to a financial adviser with $1000 and not much else. They appreciate the offer but they don’t see the value in it.”

But he said Grosvenor did not encounter any resistance to the concept of advice at some stage.

Most KiwiSaver members would need to get to a balance of about $20,000 to start to see the need for it, he said.

Grosvenor has agreements with about 400 financial advisers around the country. About 150 have a strong relationship with the firm.

Beattie said advisers were a big part of the Grosvenor business model.

As he worked with advisers over the years he had seen the value they provided and could see that most people would need advice at some time in their lives.

“We are happy to have them embedded in the business model.”

Advisers who deal with Grosvenor KiwiSaver members receive 0.5% commission per year.

Beattie said that made it a good deal for members, who could get advice whenever they needed it.  “It’s a very small price to have someone there to hold your hand when it all goes pear-shaped.”

He said when KiwiSaver was first launched the regulator had viewed it as a product that could be easily bought and sold.

But there was a much higher level of advice needed, particularly when there was a downturn in the market.

“You’ve got to stop people selling low and buying high. There are a huge number of people enrolled in KiwiSaver without access to advice and left to their own devices, doing it without knowledge. It could be a real issue at some stage when the next big market downturn happens.”