KiwiSaver

Many conservative KiwiSaver funds aren’t delivering returns to justify their fees, Morningstar’s co-head of fund research says.

The firm released its KiwiSaver survey yesterday, which is designed to help investors assess the performance of their KiwiSaver options.

Morningstar Australasia co-head of fund research Chris Douglas said global markets had bounced back in the quarter and the best-performing sectors were outside New Zealand.

“This again illustrates the importance of a well-diversified portfolio, as KiwiSavers in domestically-focused schemes will have lagged.”

Aon KiwiSaver Russell was the strongest performer in the balanced and conservative categories, while AMP KiwiSaver Lifesteps came out on top in the growth-oriented categories of growth and aggressive. Milford topped the league table in the moderate category.

But the report made note of fees.

Douglas said he was concerned that fees for conservative funds were high compared to the returns they were generating.

The survey showed a total expense ratio (TER) for conservative funds of 1.05%. Douglas said, considering those funds were aiming for mid-single digit returns, “there’s a meaningful chunk out of that performance the investor receives. I do worry about that.”

He said Morningstar paid attention to fees because they were the one constant that could be controlled. Over time, higher fees would erode performance outcomes.

Douglas cited the AON cash fund, charging 90 basis points, and Staples Rodway charging 1.19%. “Staples Rodway returned 3% and charged a 1.2% fee, the reality is there’s $19 million in there, it’s not a lot of money, but that’s pretty pricey.”

He said most KiwiSavers did not understand the fees they were paying. “If you look at the conservative peer group, there’s a number of funds charging more than 1%. That’s a very high fee to be paying for mid-single digit returns.”

Douglas said there was a risk that investors would realise after a number of years that they had been paying a high fee and had not had the returns they expected. “They’ll have had a bad experience and we hope they would leave and go to a better option, It’s the same thing as buying a car or anything but it’s more significant with KiwiSaver because it’s your retirement savings, you want to save as much as you can, every basis point counts.”

But he said there was choice available – ASB’s conservative fund’s TER is 0.34%.

KiwiSaver has been the New Zealand’s most successful savings innovation in the last hundred years, the Financial Services Council says.

Chief executive Peter Neilson said, seven years after its launch, there were a number of reasons why it had beaten expectations.

He said the main reasons were that for those who found it hard to save, KiwiSaver made it easy to enrol and put the money away before it could be spent, and the kickstart incentives and matching employer contributions made it a no-brainer for most New Zealanders.

Neilson said as KiwiSaver members saw their balances grow, they were understanding the benfit of saving a bit each week for a long time.

More than 15,000 people have used their KiwiSaver accounts to buy their first homes.

He said: “We now have more than 2.3 million New Zealanders in KiwiSaver, more than three times the Treasury’s $700,000 initial estimate but we can make it even more successful.”

He said most people were saving at the 6% rate, of 3% from themselves and 3% from their employer.  “To fund a comfortable retirement on about two times the NZ Super pension income would require the contribution rate to go to 9% or higher. If KiwiSavers defaulted into a balanced or growth fund rather than a conservative one and the over-taxation of KiwiSaver funds was addressed, the contribution rates required to fund a comfortable retirement could drop.”

Labour’s KiwiSaver policy has been criticised by the University of Auckland’s Retirement Policy and Research Centre.

In its latest Pension Commentary, the centre’s researchers say that Labour has followed a long tradition in New Zealand politics of making announcements on retirement savings issues without public discussion or supporting evidence.

Labour has said that it would increase KiwiSaver contributions, make KiwiSaver “universal” – with a number of exemptions for beneficiaries, those on limited incomes and the self-employed, stagger the payment of the $1000 kickstart and ask the Reserve Bank to implement a “variable contribution rate” to be used as a tool of monetary policy.

Susan St John, Michael Littlewood and Claire Dale write: “New Zealanders deserve a full debate on all issues associated with the financial implications of an ageing population. KiwiSaver must be part of that debate, but cannot be seen as independent of the whole retirement income framework.”

They say Labour is wrong to refer to its scheme as “universal”. “The Labour Party’s KiwiSaver will be ‘compulsory’ in the same way and to a similar extent that Australia’s Superannuation Guarantee scheme is compulsory. With universal NZS, all who qualify receive the same taxable amount, but the lump-sum at age 65 from KiwiSaver will reflect the distribution of paid work, with high earners the major beneficiaries.”

Labour’s policy would increase the risk of some sort of offset to super eventually being imposed, they said, and the fact savings could be accessed at 65 while the pension age would rise to 67 could encourage early spending of the KiwiSaver nest egg. The researchers said this already happened in Australia.

The scheme under Labour would be more like Australia’s but the RPRC report said that was not necessarily something that New Zealand should strive for.

They said Australia’s compulsory superannuation savings scheme might not have had the positive effects on the economy that it was often credited with. “It has however enriched the financial services sector … Australians now seem to arrive at retirement with greater debt, having effectively ‘pre-spent’ their retirement savings. Australians also seem to retire early to collect their lump sum saving accounts and spend those before reaching qualifying age for the means-tested state pension.”

If KiwiSavers were forced to contribute more, they might save less in other areas, they said.

The proposed exemption from KiwiSaver for people on low-incomes would hurt those workers, too, because they would not only miss out on their own savings but they would lose what their employer would have contributed.

“Labour’s policy could instead have exempted them the member’s contributions but required the employer to make the same contributions for them as for other employees. The same approach could also apply to those who are allowed to stop contributing on grounds of hardship or ill health.”

More than half of young workers aged 15-24 years are already saving for their retirement, and most of those not already saving plan to do so in the future, a new survey shows.

The latest ANZ Retirement Savings Barometer surveyed 850 New Zealanders in April and May and found that more young people are thinking about saving for their retirement.

Fifty-five per cent of young people indicated they were saving for their retirement. And 82% of those not already saving for their retirement indicated they planned to save in the future.

ANZ Wealth managing director John Body said it was great to see so many young people planning for their retirement.

“With KiwiSaver, the earlier you start saving, the better off you will be,” he said. “Official records show that more than 2 million people are now in a KiwiSaver scheme, which is a fantastic result. We know retirement seems a long way off for young people, but clearly many young people have got the message that they should start saving early.”

But the ANZ survey found that only 31% of young people were confident of saving enough money to provide the weekly income they required when they retired.

“Obviously that’s a low level of confidence, but it is not surprising,” said Body. “For a young person just starting their working life, it can seem very daunting to think about the lump sum you will need to provide a basic income when you retire. But young people have time on their side – a 45-year history of regular contributions to a KiwiSaver fund, with the right mix of investments, means they are very likely to achieve their goals.”

Body said the past seven years had been all about getting people to join a KiwiSaver scheme.