KiwiSaver

Advisers may have to wait longer than expected for a boom in demand from KiwiSavers looking for financial advice, new figures suggest.

Inland Revenue’s sixth annual review of KiwiSaver shows that while investors are becoming more active in their choice of fund, most are still making the minimum required contribution.

The report, for the 12 months to June 30 this year, shows that 67% of the 2.15 million KiwiSaver members have chosen their own scheme, up from 65% last year and only 49% back in 2008.  In 2013 there were 136,167 transfers, an increase of 24% on last year.

However, the report also shows that 58% of members are only contributing the minimum amount of 3% of their salary or wages and their employer 3%.  This is roughly the same as last year (59%) before the minimum employee and employer contribution rate was raised from 2%.

KiwiSaver has often been cited as a future catalyst for growth in the financial adviser market, but Financial Services Council chief executive Peter Neilson says the IRD figures show it will still be a few years before this happens.

“There will be an increased market for advice but if you look at the average numbers they are about $8-10,000 per person.  People with $10,000 are unlikely to be major customers of advice but they may be in ten years’ time.

“Over time it’s going in the right direction but the vast bulk of people have got very modest balances.”

And the large number of people contributing the minimum will cause balances to grow more slowly, Neilson says.

“The problem is you’ve got a large number of people in KiwiSaver contributing at relatively small rates.  You’ve also got a skew towards young people.  People in their 20s are probably not going to want advice until they are in their 30s and 40s.”

Neilson says the FSC is pleased to see more KiwiSaver members picking their own funds, but many don’t know they are in conservative funds.

FSC modelling shows that if someone on the average wage contributing 6% stays in a conservative fund for the next 40 years they’ll end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio and $250,000 less than being in a growth fund. 

Conservative funds suffer the highest effective tax rate which increases the savings required to get to a comfortable retirement, the FSC says.

A lack of independent advice for people entering KiwiSaver is a problem but will come right over time, says the chief executive of the Financial Services Council.

In its recently released annual review the FSC has reiterated its call for a more favourable tax treatment of savings investments.

It said one of its priorities was to make savers aware of how the tax system worked and the effect it had on their KiwiSaver balances.

The FSC has presented a package of options that it says would allow the Government to lower the tax on KiwiSaver so it is level with property investments.

This could be done by eliminating the hundreds of millions of dollars Government pays in tax incentives to KiwiSavers and redirecting the money.

The FSC says compound interest returns are severely hampered over a saver’s lifetime by tax.

Chief executive Peter Neilson said: “Lower taxes on savings in KiwiSaver funds would have a benefit for the economy too, dampening the attractiveness of investments in rental properties and the overheated property market and instead turning the light on to lifting productivity, wages, export competitiveness with a lower dollar and building a more robust national savings pool to fund greater investment in New Zealand enterprises and infrastructure. It may also serve to keep younger New Zealanders as contributing taxpayers at home rather than going to Australia where they could expect to receive double New Zealand’s average retirement income.”

People were missing out on advice when they signed up to KiwiSaver, he said.  “In an ideal world, people thinking about joining KiwiSaver would get advice from a financial adviser upfront… at the moment most advisers tend to avoid dealing with KiwiSaver because there isn’t fee income that’s commensurate with the time spent giving advice.”

He said that meant too many people did not realise that they were not in the right kind of fund for their circumstances.

The FSC estimates that if someone on the average wage, contributing 6%, stays in a conservative fund for the next 40 years, they will end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio, and $250,000 less than being in a growth fund.

Neilson said as balances grew, advisers would be more inclined to advise on KiwiSaver. “Most people’s balances are still too small to be attractive customers for advisers but as they grow that will change and it will cure itself over time.”

He said KiwiSaver was a low risk investment but people would still benefit hugely from having someone offer general advice before they signed up, to ensure they were with the right fund and provider.

Neilson said financial advisers could also offer great value to clients who were thinking about transferring their superannuation fees across the Tasman by pointing out the discrepancies.

Under new Trans-Tasman portability rules, savings can be moved in either direction.  But Neilson said advisers need to make sure that their clients adequately understood the tax implications of moving savings to New Zealand.

Australian superannuation is taxed at 15c in the dollar, while most New Zealanders pay 28c on their KiwiSaver accounts. “People need to get advice on whether it’s sensible to bring savings across the Tasman.”

The value of assets invested in KiwiSaver has jumped 30% in the last year, but the Government is now chipping in a lot less.

The FMA has released its KiwiSaver report for the year ended June 30. It said investment had passed $16.5 billion.

The number of KiwiSaver members had also increased almost 10%, to 2.09 million.

Of those, 22.2% of members are in default schemes. Just over 20% of all the assets invested are with the six defaults.

Last year, 22,634 people turned 65 and were eligible to withdraw their KiwiSaver accounts.

They withdrew $31.56 million. Just under $27 million was withdrawn by people who cited significant financial hardship.

Government contributions to KiwiSaver accounts dropped 60% because of changes to the amount of tax credit that is available.

Chief executive Sean Hughes said the new standardised quarterly disclosure statements for retail schemes would make it easier for members to review performance and fees across different funds and make more informed decisions.

“KiwiSaver is a key area of focus for FMA and we’ve been working hard to ensure providers are complying with their obligations, which in turn increases public confidence in KiwiSaver,” he said.

There were two new KiwiSaver schemes registered over the past year. At June 30, there were 45 schemes operating, down from 50 the previous year. Another four are in the process of being wound up.

The FMA said concentration of the sector was a key trend that could be a problem if it continued. The four largest schemes manage 76% of KiwiSaver assets, up from 69% in 2012.

Information about KiwiSaver funds’ investments should be easier to access and understand from today.

Under the new reporting regime, all providers must show on their website, in a standardised way, what fees are being charged and where money is invested.

Although there has been scepticism about how much attention consumers will pay to that data, other organisations are already finding ways to try to use it to raise awareness, particularly among savers in default funds.

The information will be used by the Commission for Retirement Income and Financial Literacy to launch a new online tool, KiwiSaver Fund Finder, to help savers compare funds’ fees, service rating, returns and switch fees. It will be live by year’s end.

Spokesman David Kneebone said he expected it to be one of many using the data.

He said too many people still could not name their KiwiSaver provider, let alone the fund they were in. “We’ve got to celebrate that they’re there in the first place, but the ideal would be their provider working with them. It’s a catch 22. I’m thrilled to see 2.2 million people in KiwiSaver but having said that, I would love to see people in the right fund. And a large percentage don’t contribute enough to get the full Government contribution.”

Historic returns were not the most important factor, and fees still had a significant influence, he said. “There is some complexsity to a KiwiSaver decision. We encourage people to look at fees, risk, whether they can afford KiwiSaver and whether they might want to use it as a first home deposit. What we’re doing is wrapping a lot of financial education around key statistics.”

Milton Jennings, CEO of Fidelity Life, which sold its KiwiSaver business to Grosvenor, said any tools that helped people understand their investments were useful. “Now balances are starting to grow, people are taking more of an interest.”

He said it was important to understand that high-risk investments, such as equities, involved periods of correction as well strong growth.

The Financial Markets Authority has also published new information for people wondering how to compare funds.