KiwiSaver

A new bill hopes to address low contribution rates in the retirement savings scheme.

The Taxation (Annual Rates for 2018–19, Modernising Tax Administration, and Remedial Matters) Bill has been introduced to Parliament, introducing enhancements to KiwiSaver in line with the Retirement Commissioner’s December 2016 review of retirement income policy.

Among the changes it would introduce is a move to allow people over 65 to join the scheme, to give them access to KiwiSaver as a provider of low-cost managed funds through retirement.

It would also remove the lock-in period that requires people over 65 to stay in for five years before they withdraw their money.

Both changes would come into force next July if the bill is passed.

At the moment people over 65 cannot join KiwiSaver or move to a new scheme, although they can continue to contribute to their accounts if they are already a member.

People who want to withdraw their money have to wait – a rule that was designed to stop them joining simply for the $1000 kickstart, which has since been removed.

Other changes, which the bill would bring into force in April, include new contribution rates of 6% and 1%, reducing the maximum contributions holiday that people can take from the scheme to one year, and renaming that holiday a “savings suspension”.

In its regulatory impact assessment, Inland Revenue said the changes should address low contribution rates and long contribution holidays being taken by KiwiSaver members.

In the year ended June 31, 2017, 131,710 members were on a contributions holiday. Almost 85% were for five years.

“Stopping contributions for five years has a significant impact on members’ savings, and also means members generally do not receive the member tax credit or employer contributions during this period,” Inland Revenue said.

“The purpose of the contributions holiday is to ensure members can take a break from making contributions when they are not in a financial position to do so. However, having a default five year contributions holiday period is likely to be longer than necessary for many members (whose financial position is likely to improve in the interim period).”

It said the new contribution rates should help savings rates and give more flexibility for members.

“The additional 6% rate would also address the gap between the current 4% and 8% contribution rates, which the Review indicated many members think is too large. This view is supported by the fact that 24% of members contribute at the 4% rate, but only 9% of members contribute at the 8% rate.”

 

Investors who work with advisers are on track to achieve better outcomes in their KiwiSaver accounts.

Data from ANZ and Booster shows that KiwiSaver members who work with advisers have more allocation to growth assets.

At Booster, investors aged between 17 and 32 have 30% higher exposure to growth assets, which chief investment officer David Beattie said was due in part to the effect of unadvised default members ending up in conservative funds.

But even between age 33 and 60, members with an adviser had 15% allocation to growth.

“The risk profile of average advised members from 40 to 65 becomes more risk averse as they get older, which is what you would expect,” Beattie said.

“However, the average unadvised member’s risk profiles for 40 to 65 is not changing and in fact strangely spikes up at the end.”

He said the flat average risk profiles of advised members aged 15-35 would be more aggressive and more downward sloping were it not for first-home withdrawals. 

“That supports the hypothesis that they are being advised well.”

At ANZ, general manager of wealth products Ana-Marie Lockyer said, when default clients and those in lifetimes funds were taken out of the mix, the data showed that there was a higher bias to growth funds, either diversified or single sector, in the One Answer KiwiSaver fund for members with advisers.

“That seems to be prevalent at all age groups except 26 to 35 when they are more likely not to have  a bias to growth because they tend to be saving for a first home.”

The biggest difference was in people aged over 46, she said.

Over an investor’s lifetime, more exposure to growth assets should lead to better outcomes.

Beattie said there was still not strong demand for KiwiSaver advice. Booster has now sent out two years of statements with a forecast lump sum and indication of the retirement income that could be expected.

“We through that might be a catalyst for clients with advisers to contact their advisers and ask ‘what can I do to lift that’ but there has not been a lot of engagement, It’s not quite at the forefront of their minds.”

He said it might not e until average balances hit about $30,000 that people became more concerned.

Chris Douglas, director of manager rating research at Morningstar Asia-Pacific said advisers could also be expected to help clients stay the course when markets were shaky, boosting their returns.

NZ Funds has conducted some research on what people like and what motivates their decisions when making KiwiSaver decisions. It makes for interesting reading.

There has been a lot of conjecture in the media about what KiwiSaver investors should focus on, but less research into what they like and what motivates their decision.

Recent media, and to a lesser extent regulatory focus, has been on fees, but fees came last in a list of attributes ranked through NZ Funds’ inaugural KiwiSaver survey.

Members of the NZ Funds KiwiSaver scheme, as well as the employees of over 200 firms from NZ Funds Wealth at Work programme, were asked five questions in total. The questions were limited in number to encourage as large a response as possible, but through the survey’s thoughtful design, information was gathered on 19 topics.

Respondents were asked to rank what appealed to them most when selecting a KiwiSaver scheme.

Interestingly, responsible investing ranked highest, ahead of: returns; New Zealand ownership; lower risk and fees, with 35% of the vote.

Returns from most schemes have been strong, reflecting a period of global synchronized growth, so investors have been able to focus on how their returns are being earned. It will be interesting to see if investors continue to value a responsible investment approach during a financial market downturn.

Less surprisingly, returns were ranked the next most important factor with 29% of the vote. This is consistent with investors wishing to see their savings compounding at a faster rate than term deposits, and a corresponding shift away from default schemes toward more growth orientated schemes.

What is surprising is that despite the acknowledged importance of returns, 16.4% of KiwiSaver members are still invested with default schemes. As financial literacy improves, this group should decline.

Another surprise of the survey was how highly respondents ranked New Zealand ownership. The success of the New Zealand Superannuation Fund, managed by its New Zealand investment team, the Guardians of New Zealand Superannuation, has demonstrated that New Zealanders can manage money very well indeed. It might also be the case that what works for Australian or Japanese owned organisations might not be what New Zealanders are looking for, and as a nation we’re cottoning on to that.

Seven percent of respondents rated lower risk as the most important attribute, while only 3% ranked fees as the most appealing factor in a scheme.

It is surprising to see risk receive such a small allocation of the votes. That may change after a market correction.

However, it does show that the FMA has done an excellent job in re-establishing trust between investment managers and the public; and in the idea of KiwiSaver. 

Fees ranked last out of five factors. While fees are an important factor, they are only one factor.

After 10 years it is becoming clear that investors’ asset allocation and contribution rate are the two most important factors. NZ Funds’ research shows that investors’ contribution rate can be nearly three times more significant than fees.

It also reflects that across the board, KiwiSaver fees are fair and reasonable. While different providers provide a different level of fees, they also provide different levels of service.

If you want to be diversified by asset type and/or geographic region, use a multi-manager approach, ensure your funds are responsibly invested and perhaps use an automated rebalancing process as well as have access to a personal financial adviser to help you build your retirement wealth, these things will end up costing you slightly more.

The survey shows that New Zealanders get that.

* New Zealand Funds Management Limited is the issuer of the NZ Funds KiwiSaver Scheme. Download the Scheme’s product
disclosure statement at www.nzfunds.co.nz.

 

Commission should be banned for financial advisers offering advice on KiwiSaver, Milford Asset Management chief executive Troy Swann has told an even in Auckland.

The Commission for Financial Capability this week held its annual summit.

A panel was asked for views on how KiwiSaver should be changed, as it goes into its second decade of existence.

Commission investor education group manager David Boyle said the lack of contribution, general low balances, and the conservative investment profile of many investors, were a major problem for the scheme, despite the large number of people who had joined.

Swann said, among other changes, there should be no commission paid on advice for KiwiSaver in future.

It altered recommendations advisers gave, he said, and was not good for the country.

Milford does not pay commission to advisers for KiwiSaver.

But Liam Mason, head of regulation at the Financial Markets Authority, said financial advice had a key part to play in KiwiSaver.

Members who sought advice and came up with a plan in the years close to retirement had much better rates of achieving their goals, he said.

“If you can get financial advice in the last few years of savings, the outcomes go up dramatically.”

He said New Zealand should be asking “quite a lot of people who get to wear the KiwiSaver badge”. 

Sam Stubbs, founder of Simplicity, which also does not pay commission to advisers, said some providers would experience a shake-up of distribution over the coming years.

“AI is going to decimate traditional distribution channels and advice. It’s free and transparent and transparency is not a feature of the financial services industry. That will happen fairly quickly.”

AI would draw on publicly available information to provide simple personalised advice within 12 or 18 months, he said.

“We’ve said we’re doing to do it, produce an product-agnostic, open-source platform that’s free to everyone. That’s the way that advice gets into the hands of people who can’t afford to get advice.”

Providers who created good products that helped people would do well, he said. But moat-based businesses that relied on distribution channels would face a serious challenge from technology.