KiwiSaver

KiwiSaver members in default schemes may have missed out on as much as $200 million in performance returns over the past 12 months because they are not in the right scheme.

Almost 50 per cent of the 2.3 million people in KiwiSaver are in low-risk, conservative or cash funds. Twenty per cent of members are in one of the nine default funds they are automatically enrolled into when they join the scheme.

ANZ general manager of wealth products and marketing Ana-Marie Lockyer said someone earning $55,000, contributing 3% of their salary, matched by 3% of their employer’s salary, would have increased their KiwiSaver balance from $10,000 at the beginning of 2012 to $25,619 at the end of November 2014, if they were in ANZ’s conservative fund. If they did the same thing in the bank’s growth fund, they would have $30,668, or $5000 more.

The employee’s own contributions made up 60% of their balance in the conservative fund, but only 50%in the growth fund.

“We believe that being in the right fund can make a big difference to reaching your retirement savings goals, given this difference over a short period of time recently.  Most of us will have our savings for 45-plus years so depending on long-term performance factors you can see it will make a big difference,” Lockyer said.

Lockyer called for a lifetime approach for default schemes where an investor’s risk profile was adjusted to fit their stage in life.

She said if default scheme members were put on a lifetime rather than conservative approach, they would have been a combined $200 million better off over the past 12 months.

“This is a significant number and a slice of this may belong to any default member who has not taken the time to confirm if the fund they were defaulted into is right for them.”

There are calls for advisers to be more proactive about encouraging KiwiSaver members to seek advice.

Many financial advisers have steered clear of KiwiSaver so far because commission rates are not high enough to compensate for the time involved in giving advice on still-small balances.

But balances are growing quickly. The cumulative value of maturing KiwiSavers is expected to hit $800 million in 2015.

Those earning more than $80,000 who reach 65 in 2028 are tipped to have $13 billion at their disposal.

Clayton Coplestone, of Heathcote Investment Partners, said advisers had told him KiwiSaver members with higher balances were already seeking and prepared to pay for financial guidance to ensure they received the best outcome from their savings.

“Anecdotally this tends to be with non-aligned advisers – as larger financial institutions tend to provide more homogenous solutions.”

Institute of Financial Advisers chief executive Fred Dodds said people with higher incomes and those contributing at higher rates would have significant balances and would want expert advice. 

People were starting to make inquiries about KiwiSaver advice, he said, but there was still work to be done in the marketplace. “I think a lot of people are in KiwiSaver and thinking they’re okay. They haven’t done the sums around what they’ll have when they get to 65.”

They needed to be guided in thinking about how much capital they would need, whether it would be left intact or run down, and whether they want to leave an inheritance. “To get a clear picture in their minds they should talk to an adviser.”

Advisers should be willing to take KiwiSaver members on even if it did not seem economic at first, he said.

A client with $25,000 in KiwiSaver would be unlikely to pay for advice and would only net an adviser about $75 a year in commission. But Dodds said dealing with them offered the opportunity of promoting personalised financial advice.

Advisers would often find people needed advice on other products at the same time, such as insurances, he said.

“Even if there’s not a lot of inquiry from the public, advisers should be out there saying ‘are you in KiwiSaver, have you been in there from the beginning? Then you should talk to me’. Get on the front foot, that would be my message.”

A strong local bias in KiwiSaver and non-KiwiSaver investments is leaving New Zealand investors vulnerable in the event of an economic crisis, one fund manager says.

KiwiSaver funds have a strong local investment slant.

According to the Reserve Bank, there is $10.6 billion of KiwiSaver funds invested in New Zealand assets, compared to $11.7 billion in offshore assets – a strong bias to New Zealand assets considering New Zealand represents just 0.1% of global sharemarkets by capitalisation.

Default funds with high cash and NZ bond balances affect the overall allocations.

Morningstar estimated that 27.4% of KiwiSaver allocations are to international shares while 13.2% is to New Zealand and Australian shares.

Pathfinder Asset Management’s John Berry said this was a clear indication of home country bias. “If all of New Zealand’s listed companies were combined into one mega-corporation, that company would still only rate as number 61 in the S&P500.  There are 60 listed companies in the US alone that are bigger than NZ’s entire market.”

But he said it was not uncommon to favour assets close to home. Concerns have been raised in Australia about self-managed superannuation funds investing only in Australian cash, property and equities. They are being encouraged to seek professional advice to reduce their concentration risk.

Berry said: “Investors in all countries tend to suffer a home bias – we naturally want to invest in what we understand and what is familiar to us.”

Berry said it created a potential risk for New Zealand savers. “In aggregate the KiwiSaver savings pool is overexposed to New Zealand cash, bonds and shares.  Given we are such a small economy and investors are already exposed to the NZ economy through non-KiwiSaver investments, including housing, more diversification away from New Zealand risk would be sensible.  If New Zealand was to face an economic crisis, many investors could suffer by having both their KiwiSaver and non-KiwiSaver eggs in one concentrated basket.”

He said if KiwiSaver investors were getting advice, the asset allocation of the $20 billion in KiwiSaver would look quite different.

A lower Kiwi dollar may make KiwiSaver funds invested internationally look more appealing.

Since July, the Kiwi dollar has fallen from US88c to hover around US77c.

Research house Morningstar’s survey of the retirement savings scheme providers found those with international exposure had been standout performers over the September quarter.

It said the sharp fall in the dollar meant all major stock markets around the world produced positive returns in NZ dollar terms.

The OneAnswer International Share fund produced an 18.5% pa return over the past three years.

NZX-owned Fundsource reported performance in the quarter was correlated with allocation to global equities.

The growth category, with an average 46.5% allocation to global shares, had returns of 3.62% over the quarter, compared to 2.88% for the balanced category, which has just under 30% exposure.  Funds with 100% allocation to global equities returned an average 5.8%.

Fundsource’s Sam Stanley said the decision for investors was not as simple as moving their money to a manager who would invest it offshore because different managers would have different levels of hedging. He said this would make a big difference to the funds’ performance.

NZX-run Smartkiwi is one of the few that is completely unhedged.

David Boyle, of the Commission for Financial Capability, said if investors could see currency risks being managed, movement in the dollar should not be a reason to change funds. He recommended investors ask their provider what their processes were.