KiwiSaver, still evolving, turns 7

Retirement scheme KiwiSaver turned seven this week with politicians and lobby groups making or proposing changes to the way the scheme operates. Business editor Dene Mackenzie reports on what usually becomes a major election issue - retirement savings.

Happy Birthday to KiwiSaver, the press releases said this week as the Labour Party-introduced retirement savings scheme turned seven.

But as expected, there were some changes announced and suggested in the way the scheme is operated.

Saving for retirement is a political football, stretching back further than just former prime minister Dame Jenny Shipley campaigning hard to defeat a suggestion from New Zealand First leader Winston Peters for compulsory superannuation saving.

Commerce Minister Craig Foss announced on the anniversary of KiwiSaver, nine KiwiSaver default providers started their seven-year appointment from July 1, offering lower fees for investors.

The default providers - AMP, ANZ, ASB, BNZ, Grosvenor, Kiwi Wealth, Mercer, Fisher Funds and Westpac - were appointed in March after a competitive tender process and assessment by an independent panel.

According to Mr Foss, a default fund aimed to provide stable returns and build confidence while members considered what type of investment best suited their individual circumstances. Mr Foss also announced the default funds would offer lower fees for investors. As an example, he used average annual fees falling from $69 to $56, immediately benefiting about 450,000 New Zealanders.

Those figures caught Dunedin financial adviser Peter Smith by surprise.

''Some providers must be charging plenty as I have not seen a fee over $36 a year from the companies I deal with,'' Mr Smith said.

He also took issue with the claims from Mr Foss default funds provided stable returns and built confidence.

''This suggests he thinks KiwiSavers will actually do something with their funds once in a default fund. Past experience suggests that will never happen,'' Mr Smith said.

At March 31, according to Morningstar's quarterly report, 27% of all KiwiSaver funds were in default funds, Mr Smith said.

If you went back to the 2012 Morningstar report, 23% of total KiwiSaver funds were in default funds. As the total funds in KiwiSaver had increased, the amount going to default funds had increased in tandem with them.

The message had not got through, he said.

''With the addition of four more default providers to the scheme, my opinion is it will just increase the amount held in default funds. It all depends on how proactive the nine default providers will be.''

The prime problem with default funds was 80% of them were of conservative nature. On average, a default fund had 18% invested in New Zealand, 42% invested internationally and 20% in fixed interest and cash.

A person aged under 35 had at least 35 years to retirement. Their money should be invested in a growth fund of about 80% in equities, and 20% in cash and fixed interest because long-term records showed equities, over time, provide superior returns to cash and fixed interest, Mr Smith said.

Financial Services Council chief executive Peter Neilson said KiwiSaver had been New Zealand's most successful savings innovation in the past 100 years and there were several reasons why it had outperformed what even its most enthusiastic supporters expected.

The reasons included KiwiSaver making it easy for those finding it hard to save to both enrol and put the money safely away before it could be spent.

The kick-start incentives and matching employer contributions made it a ''no brainer'' for most New Zealanders.

More than 15,000 New Zealanders had benefited from using KiwiSaver to purchase a first home and many more planned to do so, Mr Neilson said.

There were more than 2.3 million New Zealanders in KiwiSaver, more than three times the Treasury's 700,000 initial estimate. But it could be even more successful.

Most people were currently saving at the 6% rate - 3% from themselves and 3% from their employer. To fund a comfortable retirement on about twice the New Zealand Superannuation current pension rate of $282 after tax for each person in a couple, the contribution rate would need to go to 9% or higher, he said.

If KiwiSavers defaulted into a balanced or growth fund, rather than a conservative one, and the overtaxation of KiwiSaver funds was addressed, the contribution rates required to fund a comfortable retirement could drop to 7.6%, or even 6.1% allowing for someone on a modest income.

Only 7.9% of New Zealanders believed they could live comfortably on New Zealand superannuation alone.

It was up to politicians to decide how to increase the coverage and contributions into KiwiSaver.

''As KiwiSavers see their balances steadily grow, New Zealanders are understanding the benefits of saving a little each week for a long time to build a retirement next egg and increasing their financial literacy while it happens,'' Mr Neilson said.

Mr Smith said it would be interesting to see how well Mr Foss' claims of default providers having to offer investor education worked out.

Comments provided by Grosvenor appeared as if it would provide personal one-on-one service to people who ended up in its default funds.

Having recently acquired Fidelity's KiwiSaver business, it now worked in close partnership with one of the largest adviser distribution forces in New Zealand.

However, larger institutions such as ANZ did not have the resources to provide individual services when it was dealing with 26% of the total KiwiSaver market.

ANZ planned to support the increased focus on member education and the need to offer investor education to encourage members to make an active choice, Mr Smith said.

''I hope, should KiwiSaver investors seek advice, they will be directed to an authorised financial adviser. After all, under the Financial Advisers Act, it is a Category 1 product. Many of us in the financial services industry provide a KiwiSaver service at no cost because we are looking at the long-term big picture of when the saver reached retirement,'' he said.

Labour Party finance spokesman David Parker said KiwiSaver was a Labour policy National vociferously opposed at the time but now supported through gritted teeth.

''On the day when there's something to celebrate, it's sad National has to resort to myth-making and scare tactics regarding Labour's capital gains tax and KiwiSaver.''

Labour's proposed capital gains tax would not increase the level of taxation on incomes derived from KiwiSaver or other retirement savings schemes, he said. Labour would build on the past successes by incrementally increasing employer and employee contributions to a total of 9%.


Add a Comment