Everything you need to know about your KiwiSaver

by Pattrick Smellie / 04 June, 2018

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More than 2.8 million New Zealanders are in KiwiSaver – way ahead of forecasts. So why aren’t we making the most of our investments? Here’s how. 

Call centre staff at retirement funds manager KiwiWealth returned to work on Wednesday, February 7, to phone lines that were running hot.

Much of the country had taken a four-day weekend including Waitangi Day. Yet the mini-holiday fell in the middle of one of the biggest convulsions in global financial markets of the past decade. Suddenly, after what has been a period of remarkable stability and growth since the global financial crisis in September 2008, share-price indexes were all over the place.

Historically low interest rates and money-printing by the world’s most powerful central banks since the crisis have fed an almost ceaseless upward march in the value of shares and property.

The February blip was a warning: this won’t last forever. Between February 1 and 9, about US$5 trillion ($7.2 trillion) was wiped off the value of global financial markets.

“There was a real dip in the markets and it was quite prominent on the news on Waitangi Day,” says KiwiWealth’s general manager of customers, products and innovation, Joe Bishop. “When we came in on that Wednesday, there was a spike in the number of people looking to understand a little bit more.”

New Zealanders generally don’t ask a lot of questions about or make a lot of changes to our KiwiSaver fund choices, says Massey University business school’s Claire Matthews, who studies the sector. We are a population that is “apathetic” at best about our involvement in KiwiSaver.

As an “active” KiwiSaver funds manager, with about $3.5 billion invested on behalf of about 185,000 New Zealanders, KiwiWealth is one of the few providers with its own investment team, who pick shares, bonds and other investments across the globe.

Unlike KiwiSaver funds that rely on lower cost “passive” investment strategies, KiwiWealth charges more for its results and spends more on serving individual customers. It expects those customer calls and invests in online tools, videos and guides both to meet and control the cost of such demands.

Its fees are higher than those KiwiSaver providers who offer more of a no-frills approach to investment, putting their members’ funds into some of the more than 8000 passive investment funds available worldwide. Such funds simply follow their chosen markets up and down, requiring no day-to-day decisions. Active-fund managers, by contrast, hire specialist teams to try to second-guess where global and local markets will go next.

Simplicity’s Sam Stubbs. Photo/Angie Humphreys

Simplicity’s Sam Stubbs. Photo/Angie Humphreys

A debate rages between those who believe active management is better than passive investment. The noisiest proponent of the passive model is also the smallest KiwiSaver provider, Simplicity. Its founder, long-time financial markets operator Sam Stubbs, launched Simplicity’s low-cost business model 19 months ago, shaking up the sector with little more in the way of marketing than a willingness to be quotable about the easy ride he reckons the biggest KiwiSaver providers have enjoyed since the scheme was established in 2007.

So far, he’s attracted more than 14,000 people to Simplicity with his non-profit model, which makes charitable donations instead of declaring dividends and now boasts $425 million in “funds under management”.

That may sound a lot of money, but Simplicity’s share of the KiwiSaver market is less than 1% of the total $45.6 billion that was invested up to the end of 2017. Of that total, 83% is in the hands of the six largest providers, according to KiwiSaver analyst Morningstar, and $8.7 billion – nearly one in every five KiwiSaver dollars invested – is parked in the default funds where new KiwiSaver members are sent when they either don’t know or bother to choose what sort of fund they want to be in.

Unsurprisingly, the default providers, which include banking and insurance heavyweights AMP, ANZ, BNZ, ASB, Booster and Westpac, are also among the largest KiwiSaver fund managers.

Yet although Simplicity may be small beer, competitors care about the shake-up Stubbs has brought to the market, with his promise of low fees based on passive funds.

After all, the Treasury estimates KiwiSaver investments will be worth more than $200 billion by 2030. That’s a lot of money to earn fees on. Not too much work is required on the part of KiwiSaver providers, which collected management fees of $82.4 million from the 30 KiwiSaver schemes on offer at the end of last year. On top of that was another $266.3 million in performance-management fees.

Understanding the interaction between all these fees and the returns produced in a KiwiSaver fund can be both confusing and intimidating. For example, financial markets produced strong returns on investment for KiwiSaver funds in 2017. As a result, performance-based investment management fees rose 21.3%, compared with the year before. However, those fees fell as a proportion of total returns to 9.8% in 2017 from 16.9% in 2016, reflecting strong wealth creation last year.

At the same time, however, the basic management fee for administering an average KiwiSaver account rose from $84.15 to $97.82 – a 16.2% rise when the bureaucracy of managing a KiwiSaver fund didn’t change much, if at all.

Massey University business school’s Claire Matthews.

Keeping track

If you’ve lost the thread by now, don’t be ashamed: you’re not alone. Confusion over the blizzard of fee and performance measures is one of the driving forces behind the Financial Markets Authority’s requirement for simpler disclosure to individual account-holders.

Starting this year, the annual account summary that every KiwiSaver member must receive will be required to include a dollar figure showing the total fees their provider charged, displayed in a way that lets them see how much those fees represent as a proportion of their funds’ growth.

“In a long-term retirement planning product like KiwiSaver, making good decisions early on makes a massive difference to what you get at the end,” says FMA chief executive Rob Everett, whose job is to chivvy KiwiSaver providers into providing clear information to New Zealanders with limited understanding of their investment.

“Lots of people [in KiwiSaver schemes] don’t feel like or really regard themselves as investors, and they’re not engaged. Sometimes, in a regulator’s world, you can get obsessed with driving into some spaces where in reality there are very few investors, and they’re all ultra-high net worth and probably all capable of getting advice and looking after themselves.

“KiwiSaver is where our mandate hits the mass market.” It is “critical because it reaches your average New Zealander”.

Which is all very well, except for one thing: everyone, including Everett, acknowledges that fees are not the only, or even the most important, factor to consider when it comes to choosing the right KiwiSaver scheme.

“I think it’s a great first step, providing dollar figures for fees on annual member statements, but it’s only a first step,” says Bishop. KiwiWealth already publishes such figures monthly. “A lot of people in KiwiSaver have never really had investments before and wealth feels very exclusionary to them. ‘Wealth is for the wealthy’ is something we hear a lot,” he says. Not only is the “archetypal financial adviser in a pin-striped suit with a briefcase” an unapproachable alien, but “some people don’t even know what questions to ask.”

To deal with that, KiwiWealth this week became the first KiwiSaver provider to be granted an exemption by the FMA allowing it to deliver so-called “robo-advice” – personalised investment advice generated by computer – rather than via a human being, as the law requires.

KiwiWealth’s Joe Bishop. Photo/Lindsay Keats

Others will quickly follow, including global funds manager Nikko Asset Management, which became the latest entrant into the KiwiSaver market last month, offering a no-management-fee deal until March next year.

The rise of robo-advice represents a new way for people with limited financial literacy or a preference for Google over a warm body to “start to get a sense of how investing differs from saving and understanding terms that mean nothing to them”, says Bishop.

The FMA’s next most likely move will be to require KiwiSaver funds to project the future value of an individual’s fund when they reach retirement, based on their current balance and the type of fund they’ve chosen to be in.

“It was due to be coming in at the same time as the dollar fees but has been pushed back a year,” says Bishop.

The rise of “big data” and artificial intelligence is a major factor in this process.

Says the ANZ Bank’s chief executive, David Hisco: “We know a lot about our customers’ own lives through seeing everything that goes through their bank account. We are now harnessing the power of that data to give information back to those customers, saying, ‘Actually, now that we can analyse the data in real time and really get some insights into it, we can see that there is a better product for you’, for example.”

If that all sounds a bit too much like customers being stitched up to take KiwiSaver products from their main bank, Matthews points to the emergence offshore of “open banking” to spur competition. That’s where individuals can see all their accounts in one place online, even if they’re with different banks and financial service providers.

Open banking would help break down the tendency for banks to get KiwiSaver members by default, thanks to their customers liking to check their KiwiSaver balance when doing their banking. “That’s not good, by the way, even though it’s what people like,” says Matthews of constantly monitoring the balance in your KiwiSaver fund.

“If you’re looking at it all the time and seeing it going up and down as the market fluctuates, it could drive inappropriate behaviour. The reality is that a lot of Kiwis don’t have a good level of financial literacy, so they don’t have a good understanding of those fluctuations.”

Milford Asset Management’s Brian Gaynor. Photo/Rebekah Robinson

Milford Asset Management’s Brian Gaynor. Photo/Rebekah Robinson

The trend is your friend

Sudden changes in investment-market conditions could prompt panicky novices to change funds if they see the value of their investments falling.

That’s all the more likely because, for 10 of the 11 years since the KiwiSaver scheme was implemented, global financial markets have been an almost one-way bet, with only occasional blips like the one in February.

Brian Gaynor, a founder at one of New Zealand’s best-performing KiwiSaver providers, Milford Asset Management, readily concedes that, “Obviously, after 10 years, you’re getting closer to the end of it. Nothing stays good forever.”

But he says he’s “cautiously optimistic, and I mean cautious more than optimistic”,  about the investment outlook for the next couple of years.

“We watch it very carefully and the signs are still pretty okay,” he says. The world economy is growing quite strongly and worldwide company profitability is “as good as it’s been for a long time”.

There are also few signs of a return to significantly higher inflation, which would justify higher interest rates that would in turn slow growth rates, although the US Federal Reserve has been quietly raising rates for the past three years.

Grant Hassell, managing director and chief investment officer at AMP, says, “I actually thought markets looked riskier a year ago when bond yields were lower and equities [shares] were at higher valuations.

AMP’s Grant Hassell. Photo/Chris Parker

“Since then, bond yields [interest rates on tradeable, interest rate-bearing investments] have risen to be about 3% in the US and equities have eased a bit, so if anything, the current outlook is less volatile than it was 12 months ago.”

That convergence “should provide a buffer to balanced portfolios that might not have been there a little over a year ago”.

But what a professional investor thinks is about to happen is far less important than choosing the right type of KiwiSaver fund. “For KiwiSaver account holders, age and level of conservatism are the main things to have in mind rather than whether we’re going to have a downturn in the next two or three years,” says Hassell.

The rule of thumb is simple: if you want the money soon, invest in a conservative fund. Its returns are unlikely to be spectacular because most of it will be invested more or less as cash at the bank, but your original nest egg is most unlikely to be smaller than when you started.

If, on the other hand, you have a whole working life ahead of you and are not planning to use KiwiSaver funds to help buy a house in the near future, conventional wisdom and almost any piece of investment research will tell you to go for a “growth” or even an “aggressive” fund.

In times of recession or political turmoil, your funds may lose value. But over a 20- to 40-year horizon, it’s almost unheard of for a growth fund, which tends to have most of its money in shares, to do worse than a conservative fund, which buys only investments that pay interest. In fact, Gaynor believes one urgent reform that would benefit thousands of young KiwiSavers would be to change the requirement for default funds to follow conservative investment strategies.

“When you go into a default [fund] in Australia, you go into a growth fund,” says Gaynor, reflecting the fact that most default-fund members will also be young people with decades to go to retirement.

Source: Morningstar, FMA KiwiSaver Tracker

He believes New Zealand opted for a conservative approach to default funds because then Finance Minister Michael Cullen “was very determined that it should get off to a good start and that people weren’t exposed to growth funds that lost money straight away”.

That worked brilliantly. More than 2.8 million people are in the voluntary KiwiSaver scheme, “way ahead of any forecast” and “confidence in the scheme is very high”.

“I don’t think they did anything wrong in the way they set it up, but it’s now time to change that. Even if it was just a balanced fund – it doesn’t have to be growth,” says Gaynor.

It may make sense for a young KiwiSaver member to actively choose a conservative scheme if they’re saving for a house deposit and will need the money soon. Otherwise, Gaynor says, “People under the age of 40 should not be in conservative default funds.”

Everett agrees. He has failed for two years to improve the rate at which default-fund members switch into a fund of their choice.

“I do think that default mechanism is trapping people through inertia,” he says. He’d like to find a way, which could include penalising default-fund providers by cutting their fees if a person stays in a default fund.

“So, don’t pay the provider, for instance, if someone has been in the default fund for more than a year.  Just say you don’t get to collect any fees. The only way this is going to work is either completely change the default mechanism or you find a really blunt way of incentivising the provider to get people to make a decision.”

KiwiSaver confidence

Do

Compare fees and returns using the growing range of tools available on the websites of the Government’s Financial Markets Authority and Commission for Financial Capability. The FMA’s KiwiSaver Tracker shows the effect of fees in a simple visual way, whereas the CFFC’s site, sorted.org.nz, is brimming with impartial advice on comparisons.

Don’t

change your KiwiSaver provider or fund type based on the fees alone. Higher-risk and more actively managed KiwiSaver funds should cost more because they are also seeking larger returns in the long term. “I would be very concerned if people simply said, ‘I want the cheapest provider’, because that might not be the best for them,” says Massey University banking professor Claire Matthews.

Do

Look at the five-year average returns rather than what happened in the past year.

Don’t

Change your fund just because it lost ground in the past year, especially if it’s a growth-oriented or “aggressive” fund. Investing is different from saving and these funds are long-term bets. There will always be ups and downs along the way.

Do

Read your annual statement. Matthews worries that although disclosing annual fees in dollars is a good thing, few people are bothering to read the annual information their KiwiSaver provider sends. “I suspect a number of people get them and don’t even open them and if they do, throw it in the bottom drawer or whatever.”

Don’t

Expect the past to be a guide to the future. Investment theory says that long-term investors should take more risk because experience shows that generates stronger returns. However, the future is a place none of us has been yet. If you can’t tolerate risk, then maybe a conservative fund is an option for you. But remember: a 25-year-old putting 5% of his or her annual income into a KiwiSaver growth fund rather than a conservative fund can expect to increase the retirement value of their KiwiSaver account by as much as $700,000, according to Milford Asset Management.

Don’t

Stay in a default fund unless you mean to. If you haven’t actively chosen which KiwiSaver fund to be in, get off your chuff and do it. If you’re not sure what a default fund is, then you’re probably in one. And if you’re under 30, you’re letting someone else waste your money. Think of it like this: when you’re 75 years old, which would you rather be able to afford: a new pair of slippers or a spur-of-the-moment flight to see your grandchildren? Get on with it.

This article was first published in the May 26, 2018 issue of the New Zealand Listener.

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