KiwiSaver

New Zealanders are being too passive about their potential KiwiSaver earnings, according to analysis released by KPMG.

KPMG’s new Funds Industry Management Update, released today, includes several articles that highlight the strengths and gaps of our KiwiSaver scheme.

Independent investment researcher, Morningstar, says there’s an unnecessarily high concentration of KiwiSaver investment within conservative funds – mostly due to savers who default into a scheme rather than choosing their level of risk.

“We believe this is a major flaw,” writes Morningstar analyst Elliot Smith.

“In Australia, most default funds are in the growth or aggressive […] categories, which is far better aligned with the long time horizon of investing for retirement.”

John Kensington, KPMG’s Head of Financial Services, agrees that New Zealanders need to take a closer look at their potential KiwiSaver growth – given that in recent times a growth fund can deliver double-figure rates of return, compared to a cash fund at around 2-3%.

“As a rule of thumb, if you’re aged between 25-40, you should be more disposed to a growth fund; as you have plenty of time to earn at higher level and recover should the market fall. If you are a little older, you might lean toward a balanced or growth fund. People who should be in a conservative fund are those who are nearing retirement age and wanting certainty around their capital – but even then, they might want to split their risk.”

John Kensington encourages New Zealanders to further educate themselves around their investment needs, their risk appetite, and the range of available opportunities.

Another Update contributor, John Body of ANZ Wealth, says a joint survey by ANZ and the Council for Financial Capability in 2013 found that only 15% of people had consulted a financial adviser in the past year.

“If we look at the two million-plus members of KiwiSaver, 1.95 million of them haven’t used an adviser,” says Body.

Getting specific advice on KiwiSaver has been further complicated by the introduction of the Financial Advisers Act – which provides that advice can only be given on an individual’s entire financial position.

On a positive note, Morningstar said New Zealand politicians, investors and industry players “should applaud the evolution of the [KiwiSaver] scheme since its 2007 launch, especially it’s expectation-beating rate of adoption.”

Another “under-the-radar” positive of the scheme was the multimanager structure – which allows KiwiSaver providers to have elements of their managed by some very highly-regarded equity managers.

“The standard of the underlying managers is generally very high, with investors getting access to high-quality investment professionals both locally and abroad.”

Kensington says KiwiSaver has been a game-changer for the New Zealand funds management industry.

“With its semi-compulsory nature, KiwiSaver has exposed a large number of New Zealanders to what it means to invest, and what a set of investment fund accounts look like. As the investment pool in KiwiSaver continues to grow, the spin-off effects will increase. Not only will we be a nation that provides for its retirement – we’ll also have a more financially literate population, and a culture of saving.”

KiwiSaver advice practices will always be a point of interest to the Financial Markets Authority, its director of markets oversight says.

The FMA has released its latest KiwiSaver report, which shows the amount earned from the scheme’s investments doubled in the year to March from a year earlier. Assets increased by 33% to $28.5 billion.

The FMA expects to publish a report on KiwiSaver sales and advice practices later this year.

There had been concerns about KiwiSaver members being encouraged to switch fund without adequate information but the report showed that transfers had plateaued. Many of the switches were people making an active choice to move from a default fund, which the FMA regards as positive.

About 93,000 KiwiSaver members switched fund during the year, involving $1.4 billion. More than 260 members switched their type of fund at least five times during the year.

Just under 45% of KiwiSaver assets are in low-risk investments, down from 47% in 2014.

The FMA says about two-thirds of advisers offer some form of KiwiSaver advice.

FMA director of markets oversight Garth Stanish said as balances grew it was likely more would start.

He said it was important that people received appropriate levels of support and advice when they were making decisions that would have long-term consequences. Default providers are now required to report to the FMA on financial literacy initiatives, including communications to members to encourage them to choose a fund. The FMA says it will report on this next year.

Stanish said the FMA would continue to engage with providers who are working with KiwiSaver. He said a focus for the FMA was ensuring that KiwiSaver investors had a good understanding of their investments and the positives and benefits of the fund they were in. “It is still a relatively new product in the New Zealand context and people will take time to get to grips with it as a long-term investment procut. The choices they make today can have long-term repercussions.”

The FMA report showed there are still about a million members who are classed as non-contributors, which means they have not made a contribution in the last two months or have failed to make contracted payments.

About 18,700 employers had chosen a preferred scheme for their members to be automatically enrolled in unless they chose another scheme.

AMP is calling for the one million New Zealanders who have stopped contributing to KiwiSaver on a regular basis to consider reinstating regular contributions in order to save for their retirement.

Therese Singleton, general manager of investments and insurance at AMP, says: “More than one million KiwiSaver members across New Zealand have not made a single contribution towards their KiwiSaver account in the last two months.  This could have a significant impact on their final retirement income when we know as little as $5 a week could mean around $30,000 upon retirement.

“We know for many individuals they may be on parental leave, are self-employed and haven’t gotten round to making a contribution yet or are struggling financially so the burden to save even a small amount seems insurmountable, however, a little now really can make a difference in the long run.”

She said many people did not know that if they were an employee who had taken a contributions holiday or a self-employed person, they could set up regular contributions or make a one-off without having to contribute the usual 3% of their salaries.

“The key to remember is that every little bit counts thanks to the wonder of compounding interest – especially as any contribution will count towards your Member Tax Credit which could mean up to an additional $521 from the Government each year.

“It’s important that people understand they are potentially missing out on the long term benefits of saving for their retirement and also missing out on their annual Member Tax Credit, so we’re just trying to encourage people to re-consider and get their KiwiSaver balance growing again.”

British migrants whose pensions are now trapped in KiwiSaver schemes are a roadblock for providers wanting to merge funds or acquire other schemes.

It was reported last week that 12 members of Smartshares KiwiSaver face a tax bill of up to 55% if they move their money to the now NZX-owned SuperLife scheme.

NZX has written to Smartshares KiwiSaver members suggesting they transfer to the SuperLife KiwiSaver scheme, which it acquired this year.

But 12 will not be able to because they moved their money under the QROPS regime. KiwiSaver schemes no longer qualify for QROPS under new British pension rules introduced this year.

This means any transfer to a new scheme will count as an unauthorised withdrawal and could be subject to a bill of 40% of the transfer and 15% of the balance.

Most KiwiSaver schemes, excluding ASB, BNZ and ANZ were QROPS providers under the previous rules and may have people in their schemes who are now trapped.

David Ireland, of Kensington Swan, said it would have an impact on any schemes that wanted to merge future.

Members have also lost the ability to transfer schemes to one that might be better suited to their needs.

He said Workplace Savings NZ was working with IRD and HMRC in Britain, trying to find a solution. 

“Officialdom at both ends of the globe is aware of the issue. KiwiSaver is something I don’t think HMRC fully understood when making these changes. KiwiSaver is collateral damage. For those who legitimately transferred into a KiwiSaver scheme they are caught in no man’s land.”

The NZX said it would keep the SmartKiwi scheme open to accommodate the members and any higher costs of running it with fewer members would be met by the NZX.

It told its members:  “Smartshares has raised its concerns in respect of the recent UK law changes with HMRC… We have asked HMRC to allow you to transfer to another KiwiSaver scheme without unauthorised payment charges.”

Workplace Savings NZ executive director Bruce Kerr wrote to Commerce Minister Paul Goldsmith, outlining his concerns about the trapped members.

“New Zealand’s foreign tax regime strongly incentivises transferring UK pension moneys to an NZ retirement scheme within four years after a person becomes tax resident in NZ, as unless there is a transfer within that four-year window a later payment or transfer from the UK scheme is taxable in NZ and  there is therefore a strong appetite for transfers; but the only schemes now available for UK pension transfer purposes are a limited pool of non-KiwiSaver schemes which are not subject to the unreasonable fees restriction set out in the KiwiSaver Act,” he wrote.

He said that, in cases of mergers, the Financial Markets Authority has advised that it may be unable to consent to the bulk transfer of all members and assets if there are UK pension transfer moneys in the scheme.

Goldsmith replied that IRD was working with HMRC. “Although there currently isn’t a timeframe for reaching a solution, officials are aware of the importance of solving this issue and will continue to give it a high priority.”