KiwiSaver

KiwiSaver account-holders who go bankrupt will not have to hand over their retirement savings, a court has ruled.

The Court of Appeal has decided that a bankrupt’s KiwiSaver account is off limits to the Official Assignee.

The decision has a potentially wide impact – in January there were 5559 bankrupts with KiwiSaver accounts worth more than $27 million.

The court was asked to look at whether the Insolvency Act 2006 entitles the Official Assignee to access KiwiSaver balances and whether bankruptcy automatically satisfies the significant financial hardship test for withdrawing KiwiSaver funds.

It decided the answer to both questions was no.

The Court also considered the KiwiSaver Act’s (KSA) purpose statement, which is to encourage a long-term savings habit and accumulation of funds to provide retirement security.

“There is nothing in the KSA to suggest that a purpose of the legislation is to accumulate funds for the benefit of creditors in the event of the member’s bankruptcy.  If that were the case, the important social and economic purposes of the KSA would be undermined and the burden of providing for the welfare of individuals would fall back on the state.”

It follows a High Court ruling last year that money could be put aside for creditors but they could not have it until the bankrupt person was eligible to access their KiwiSaver, typically at 65.

Law firm Chapman Tripp said the Court of Appeal decision provided much more clarity but there were still questions, such as what creditors could do if someone who was about to go bankrupt put extra money into their KiwiSaver accounts.

“There may also be a question mark now over any KiwiSaver balances which the Official Assignee was able to access prior to this decision.  Is anyone liable to the affected members?”

Some trustees initially accepted applications from the Official Assignee to withdraw money on the grounds of significant hardship but then started to decline them.

It had been argued that going into bankruptcy alleviated substantial hardship, because the bankrupt person was no longer able to be pursued by creditors.

Australian moves to limit retirees’ ability to withdraw their superannuation savings as a lump sum have prompted mixed reactions from New Zealand KiwiSaver providers.

Australian Treasury executive director and chief operating officer John Lonsdale said recommendations from the financial system inquiry to overhaul the country’s superannuation scheme were likely to be adopted.

A key finding was that people should no longer be given access to their superannuation savings as a lump sum when they retired. Instead they should be transferred automatically to a default fund designed to provide a stream of income.

Ana-Marie Lockyer, general manager, wealth products and marketing at ANZ, said she would support mechanisms such as limits to lump sum withdrawals being considered alongside the development of retirement product solutions.

She said it would not be a pressing concern until balances were bigger but providers had a responsibility to ensure that KiwiSaver members used their savings to enjoy a more comfortable retirement.

“There is no silver bullet for a post retirement product to ensure the savings will last during retirement and this is a challenge the world over.  Knowing this and looking forward a few years it is important that the industry takes adequate time now to consider a number of solutions to ensure the security of members’ KiwiSaver savings for the long term.  There will be no right solution for all members but success will be a combination of solutions and mechanisms in place,” she said.

But Jonathan Beale, general manager of wealth at ASB, said restricting lump sum access was the wrong attitude to take. “It seems to imply we don’t trust people to make the right decisions.”

He said a better solution was to improve pre-retirement education so people understood what they needed to save and that it would have to last. “If you focus on the education you hope they wouldn’t spend it all on a boat and a bach.”

Sean Donovan, of Milford, said the scheme had been sold to the public on the basis that they would have full access to the funds at 65. To change that would undermine the scheme, he said.

“The bulk of contributions are done by the individual and their employer. It seems unfair for the government to have the ability to limit how much of your money you can access in retirement.”

He said the financial services industry was capable of developing products to help clients decumulate sensibly.

In Britain, the rules have changed this month so retirees are no longer obliged to purchase an annuity when they retire.

The number of KiwiSaver providers in the New Zealand market may be unsustainable, the head of one of them says.

Mercer NZ managing director Martin Lewington said he could imagine a future where KiwiSaver was offered by a few big providers with multi-sector portfolios.

A few boutique businesses would then operate alongside, differentiating themselves with very specialised offers, such as real assets or investments in New Zealand small-cap companies.

“That could be quite a good business model,” he said.

There are 28 KiwiSaver providers in the New Zealand market. The big banks have the lion’s share of the business – almost 60%, excluding the financial adviser-distributed ANZ OneAnswer scheme.

Lewington said it was likely there were too many providers to be sustained over the long-term.

“When there’s too much choice people get confused and don’t make any decision. But I believe in the market and ultimately the market will decide if it’s too many. My personal view is that’s quite a lot of choice.”

He said there was a lot of talk about potential consolidation activity but were no real signs of it happening yet. “But you would expect it.”

Mercer is doing some consolidation of its own, however.

It has added three portfolios to its main KiwiSaver scheme – moderate, growth and shares, aligning it with its employer-based offering, Super Trust KiwiSaver.

The employer-based scheme is now closed to new members and will be combined with the main scheme.

Lewington said the two schemes had been set up to offer the same product, one as a default operation and one for people who signed up via their employer.

But he said legislative changes meant they no longer needed to be kept separate. The moves were just an in-house tidy up, he said. “The end game is that members benefit from reduced costs and reduced complexity. There were eight single-sector type KiwiSaver offerings and the market wasn’t there so we are consolidating.”

In February, the employer scheme cut its 14 portfolios down to seven.

Smaller providers will have to differentiate themselves to stand out in a KiwiSaver market dominated by banks, an investment analyst says.

Mark Weaver, of actuarial firm Meville Jessup Weaver Investments, said banks controlled 58.5% of the KiwiSaver market, not including ANZ’s OneAnswer scheme.

There are 28 KiwiSaver providers, six of which are banks.

He said ANZ, ASB and Westpac had experienced growth of more than 40% in funds under management in their KiwiSaver schemes over the past 18 months. ANZ had 53% growth, ASB 44.4% and Westpac 41.9%.

BNZ experienced 304% growth because the scheme only launched in 2013.

Growth was helped by strong market performance which lifted balanced funds 15% to 16% on average.

The top three banks in terms of scheme member numbers were the same as the top three for funds under management. ANZ is in front, followed by ASB and Westpac.  ANZ had higher member growth than Westpac and ASB over the 18-month period, at 18.4% compared to 11.8% and 14.6% respectively.

Only Kiwi Wealth members recorded a drop in the average balance size, which MJW said could be due to the scheme attracting new members.

OneAnswer had the highest average member balance, which Weaver said was likely explained by the membership profile of the scheme, mainly financial adviser clients who would make higher regular contributions and one-off amounts.

He said ANZ and OneAnswer had a much higher allocation to growth investment options than the other banks. “Perhaps ANZ have been more active in moving members of their default fund into a more appropriate investment strategy.”

With banks having such strong distribution models for their KiwiSaver offerings, Weaver said other fund manager providers would have to show what they did differently or better than the banks.  “Distribution is everything and banks have got that.”