Get ready for the changes to KiwiSaver next month.
Another year, another round of changes for the government-sponsored KiwiSaver savings scheme, with increased employer and employee contributions kicking in from next month.
Almost everyone’s KiwiSaver account is going to be a little more flush with funds as workers and bosses each up their minimum contributions from the current 2% of gross salary to 3%.
Although the Government halved the tax credit on KiwiSaver contributions in the 2012 Budget, it still offers the $1000 kick-start and an annual contribution of up to $521.43. That alone is worth about $25,500 if you sign up at 18 and take it all at 65, without including any investment returns or even compound interest.
Will the increased contributions mean your annual return should rise, too? In theory, yes, but of course that relies on the performance of your portfolio.
And those returns have helped bump up members’ accounts, with strong gains in shares and bonds in the past few years, according to Martin Lewington, chief executive of KiwiSaver scheme operator Mercer New Zealand. “There has been significant growth in funds under management; quite a lot of it is based on the market’s performance,” he says, pointing to last year’s strong run-up in New Zealand share values.
As at September last year, about $13 billion was managed by the various schemes, of which 1% goes to the fund managers in fees. In the 2011 financial year, that was some $128.5 million; the year before, $92.8 million.
In aggregate that sounds big, but Lewington reckons New Zealand’s fees, particularly for the default schemes where savers are put if they don’t actively choose their fund manager, are “incredibly competitively priced” compared with a mature market like Australia.
“Australians always roll their eyes about the low fees charged in New Zealand, particularly for the KiwiSaver products.”
Not everyone is so generous. Fees are at the heart of the latest review of the scheme, which is looking specifically at the default providers and their settings.
A discussion document from the Ministry of Business, Innovation and Employment indicated last year that officials want to find a balance between an efficient fee structure and maintaining performance, which is thrown out of kilter by the different goals of managers and members. The paper’s authors see an “inherent misalignment” between investors’ interests to maximise returns over the long term and fund managers’ incentives to increase their funds under management.
Lewington says a range of submissions have been received from across the spectrum, and the review is the latest elephant in the room, as it is also looking at whether to change how the default funds are managed.
At present, the default schemes have conservative investment mandates, which treat all savers the same. A proposal put forward last year would switch the default option from ultra-conservative to one that changes its risk weightings according to a person’s stage in life. Younger investors, with plenty of time before needing the funds, could afford to take a riskier, potentially higher returning mix of assets, while older savers would reduce their exposure to riskier assets such as shares because it will be more important to them to have the money in the next few years than to make the most of it over the course of a full working life.
Mercer supports the whole-of-life option, as it would probably deliver better outcomes for members, even if it does end up being more expensive to manage.
While that review is off in the background, the results of another come into effect this year: making schemes provide returns that are easier to compare. Lewington sees that as part of the move to make KiwiSaver members more involved with what’s happening to their investment. Aside from the regulatory wobbles to come, the marketplace seems vibrant.
Former Fisher Funds manager Warren Couillault and ex-Huljich KiwiSaver manager Henry Tongue recently launched a hedge fund-style scheme called Generate KiwiSaver, and Bank of New Zealand has finally joined the KiwiSaver party.
AMP is looking to ditch its Axa branded schemes after taking over the rival in 2011, and ASB has stopped new members from joining its FirstChoice scheme and is mulling over an inhouse merger. And at the time of writing, Fisher Funds was still said to be looking at buying Tower’s scheme.
Lewington says these are indicators of a healthy marketplace, and although the larger firms can compete strictly on price as they increase their funds under management – the source of their fees – there’s still room for smaller niche players offering customers a different service.
For this year, KiwiSaver will keep trucking on as New Zealand’s de facto compulsory retirement scheme for post-baby boomer generations. The real test will come in 2014 when the default options come under more intense scrutiny.