KiwiSaver

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.”

Most KiwiSaver members want to be able to take a DIY approach to their investments, ASB’s GM of wealth says.

Jonathan Beale said the bank has seen a big increase in the number of people making voluntary KiwiSaver contributions since it allowed them to do so online.

In 2014, the only way that people could make extra contributions to their ASB KiwiSaver account was to go into a branch. That year, about 28 people a day did so.

This year, about 30 a day are still going into a branch to make KiwiSaver contributions but another 233 a day are making KiwiSaver contributions via mobile or internet banking. Beale said contributions ranged from $25 to thousands of dollars.

He said: “It seems to me that’s where KiwiSaver needs to go, with simple tools so people can manage their KiwiSaver themselves. It tells me people want to be able to do it themselves, they don’t want to sit down with someone and get advice.”

The online KiwiSaver access also gives investors the ability to move their money between funds when they want to, as well as monitor movements in their balance.

Beale said when Chinese sharemarkets had a day of sharp volatility last month, the number of fund switches spiked to 241, from a normal rate of about 50 per day.

Beale said the switches moved from higher growth to lower growth funds.

There are fears that investors used to strong returns in growth funds may be spooked if markets tumble and put their money into lower-risk funds, consolidating their losses.

Beale said the amount of switching that had been seen so far was not a worry.

He said the bank had a policy of contacting KiwiSaver members who switched fund more than four times in a set period. “We would call them to make sure they understand what they are doing.”

He said as a percentage of the bank’s 465,000 KiwiSaver members, 241 was still a small number. “It has eased off since then.”

Government’s contribution to KiwiSaver balances has been “substantial”, a new Treasury report says.

There is now more than $27 billion invested via the retirement savings scheme and it has more than 2.5 million members.

But the report by Treasury analysts says it is hard to identify the amount of new saving created by the scheme, and what has just been transferred from other investments.

It says best estimates are that between 25 per cent and a third of the saving in KiwiSaver is “new” money that would not otherwise have been invested.

“The evidence suggests that the effect of KiwiSaver on increasing net wealth is poor,” the report says.

But it says the amount the Government has contributed in getting the scheme off the ground is significant.

Until this year it offered a $1000 kickstart to new members. Between KiwiSaver’s launch and 2011, it offered a member tax credit of $1042 to members who contributed that amount. Since then, it has offered $542 to people who save $1042 in a year.

“In June 2008, the Crown’s contribution to KiwiSaver represented over half the total payments to providers. However, this has fallen to just over 20% in June 2013. The main fall in Crown contributions seen between 2012 and 2013 resulted from the halving of the member tax credit as of July 2012,” the report said.

In 2014, the Government’s contribution represented about three-quarters of a billion dollars, out of contributions of just over $4 billion.

A Treasury report that argued KiwiSaver was not making a significant impact on savings rates was part of the reason cited for the Governmenrt removing the $1000 incentive at this year’s Budget.

Since then, many providers have reported a significant drop in the number of new enrolments.

David Boyle, of the Commission for Financial Capabiltiy, said the cost of the Crown’s contributions to KiwiSaver was something that was worth looking at.

But he was unconvinced the latest report would be used as an argument to cut member tax credits completely. “The cost to the Crown going forward is going to continue to fall as a total percentage of funds growth, The investment has been made.”

Boyle said the report’s prediction of $70 billion under management by 2020 was probably conservative.

The report also pointed out that KiwiSaver investments are heavily weighted towards income assets relative to growth. That is in contrast to other countries with similar schemes, where investors have more money in higher-growth assets.”[This] could lead to less than optimal future retirement incomes.”

Craigs Investment Partners is reporting solid growth in its KiwiSaver scheme that allows investors to select their own investments.

KiwiSTART Select is a platform that offers a range of 250 nominated securities from which clients can construct their own KiwiSaver portfolios.

Nominated securities include QuayStreet Unit Trusts and a range of investments in equities, investment trusts, managed funds, index funds and listed property trusts as well as cash.

The scheme returned 12.3% in the year to March 31 on a n aggregated basis but each member’s portfolio delivered different returns.

There were 4379 members in the scheme at the end of the 2015 financial year, compared to 4500 in Craigs’ more standard KiwiSaver scheme.

It had 216 new members over the year, including 36 transferring from an Australian scheme.

It charges an admin fee of $30 per year, and up to 1.25% for investments in self-selected portfolios.

Craigs Investment Partners head of client services Stephen Jonas said the investment selection idea was  in line with Craigs’ philosophical approach.

He said the objective was for the platform to be as agnostic as possible and operate on an almost self-managed basis.

But he said there were regulatory challenges to overcome. The Financial Markets Act requires a PDS including a risk indicator, which is hard to deduce if individuals’ investments are not known.

Jonas said the solution would probably be to describe it as a high-isk fund.

He said he expected interest to grow in DIY approaches as balances increased. The average balance of KiwiSTART Select members is higher than the industry generally, at almost $30,000.

There is no minimum balance required but every client has an AFA associated with them and those with very small balances are guided into managed funds as a way to get started. “As balances get larger they can start to enrich them.”

Jonas said he expected other similar products to launch. “In Australia just under 30% of super scheme investments are self-managed so there is a trend, when the market gets more mature more will step into that space.”