KiwiSaver

Conservative KiwiSaver funds are being tipped to barely outperform cash over the next seven years.

The New Zealand Institute of Economic Research (NZIER) has warned that KiwiSaver members in conservative funds are in for poor returns, in its first New Zealand Investment Quarterly.

Conservative funds, including the nine KiwiSaver default funds, mostly invest in sovereign (government) bonds and cash while allocating only a small proportion to shares.

They are expected to return only 4.6% per year to 2022, compared to the expected average 90-day bank bill rate of 4.2%.

“NZIER believes sovereign bonds will perform poorly in the medium term, which would drag down the returns from conservative funds,” said NZIER principal economist Aaron Drew.

Balanced funds, which invest less in government bonds and cash and more in shares, are expected to return 5.6% per year while growth funds, which mostly invest in shares, are expected to achieve an average return of 6.5%.

The returns are gross of fees and taxes.

“Conservative funds have performed very well in the low-rate environment we have seen since the GCF hit, but they are likely to significantly underperform growth funds in the long term,” Drew said. “There is a cyclical aspect to our forecast: we believe bonds, particularly sovereign bonds, are vulnerable to a correction when interest rates globally start to rise.”

Drew said funds would benefit from greater exposure to share markets and some alternative asset classes, which are expected to fare better than bonds in the medium term.

“Equities are looking like a mixed bag, with Europe, Japan and the UK offering better value than the US, Australia, Canada and New Zealand markets.”

Drew is hoping the NZIQ will re-ignite discussion about asset allocation in KiwiSaver.

Conservative and moderate funds account for almost 44% of the $27 billion measured in the latest Morningstar KiwiSaver Survey.

“Over 40 years, the difference between a growth fund and a default fund could add up to tens or even hundreds of thousands of dollars for a KiwiSaver investor,” Drew said. “There has been a lot of public discussion about KiwiSaver contribution rates and what is required to achieve a comfortable retirement, but members will not get the most out of the scheme if they are in the wrong type of fund for their risk profile and investment horizon.”

The FSC is reminding KiwiSaver members they have less than a fortnight to top up their accounts to get the maximum member tax credit this year.

Those who put at least $1042 in their accounts each year to the end of June receive the maximum $521 credit from the Government.

FSC chief executive Peter Neilson said there would be no other savings vehicle that would offer that 50% rate of return.

“$521 a year may not sound like much but over 45 years and then earning interest on the interest reinvested it could mean over $100,000 more in your retirement nest egg at age 65.”

The FSC estimates that about 460,000 New Zealanders earning less than $35,000 will probably leave money on the table because they have not contributed enough to pick up the full $521.

Those on a contribution holiday will similarly miss out on the $521. 

Neilson said he was going to top up his daughter’s KiwiSaver account because her part-time earnings while studying would not get her to the $1042 saving threshold.

He said: “With 2.5 million KiwiSaver members already enrolled it is the most successful savings innovation in the last century.  All KiwiSavers should have June 1 marked in their diary each year to remind them to check their KiwiSaver balance, whether their level of contributions will get them the full $521 tax credit, whether they are in the best investment style for them and if the current tax rate is  being applied to their fund.  Getting these settings right can mean the difference of $100,000s more in your retirement nest egg at 65.  It pays to keep an eye on your KiwiSaver account to check it is working  hard to you.”

Mercer has been given approval to combine its two KiwiSaver schemes into one.

Managing director Martin Lewington said the FMA had agreed to it transferring its Mercer Super Trust KiwiSaver scheme members into the Mercer KiwiSaver scheme.

“Combining our two KiwiSaver schemes ensures our KiwiSaver members have access to the best possible products and services in the market. Existing members of the Mercer Super Trust KiwiSaver scheme will also benefit from lower fees.”

The transfer is expected to be completed this month.

IRD says it expects to reach a resolution with its British counterpart soon, after KiwiSaver schemes were removed from its list of recognised overseas pension schemes.

New British legislation, which came in at the beginning of April, means any scheme that has qualifying registered overseas pension scheme (QROPS) status must not allow members to make any withdrawals before age 55.

All KiwiSaver schemes were disqualified as QROPS because they allow early withdrawals, such as in cases of financial hardship, when someone buys a first home or emigrates permanently.

Without QROPS status, any transfers to a KiwiSaver scheme could now attract a tax penalty of up to 55%.

Transfers that have already been made are safe.

David Milner, of Britannia Financial Services, said British HM Revenue and Customs (HMRC) had always been concerned about KiwiSaver providers allowing early access to funds.

“It’s possible UK authorities will not make changes to current regulations to exclude KiwiSaver schemes from the changes introduced. However, this issue could very quickly be resolved if the Government made changes to the KiwiSaver Act ring-fencing UK pension transfers in the same way that Australian pension transfers are ring-fenced to line up with Australian pension rules. Such a change would need to waive any rights held by KiwiSaver members who transferred prior to these changes being made,” he said.

But he said it might not be well received by people who transferred to a KiwiSaver scheme on the assumption that they would be able to make an early withdrawal.

He said he understood that was a benefit that had been promoted by some KiwiSaver providers.

Australian providers are also affected.

An IRD spokesman said: “Inland Revenue is in discussions with HMRC about this issue and we expect a resolution will be reached soon.”