Fees, nerves, and first-home-buyer activity - what the FMA's annual KiwiSaver report tells us about the state of our retirement savings scheme

Fees, nerves, and first-home-buyer activity - what the FMA's annual KiwiSaver report tells us about the state of our retirement savings scheme
Image taken from FMA's 2019 KiwiSaver report

Around 2.9 million New Zealanders now have $57 billion invested in KiwiSaver.

That’s equivalent to about a fifth of the country’s annual gross domestic product (GDP), or nearly eight times the value of the Government’s budget surplus.

The value of assets held under the scheme grew by 17% in the year to March 31, with membership numbers up 3% and returns up 19% on the previous year, despite some market volatility.

Here are four interesting takeouts from the Financial Markets Authority’s (FMA) annual report on the KiwiSaver scheme:

First-home-buyers are withdrawing almost as much as retirees

While over-65s withdrew $1.04 billion over the year (43% more than the previous year), first-home-buyers withdrew $953 million (35% more than the previous year).

The FMA couldn’t say how many over-65s made withdrawals, but noted 39,617 first-home-buyers tapped into their accounts, withdrawing an average of $24,000 each.

Indeed, Reserve Bank data shows that first-home-buyers have been relatively more active recently. Nearly 17% of new mortgage lending went to first-home-buyers in the year to March 2019 - more than the 15% the previous year and the 13% in the year to March 2017.

Fees are hardly falling   

KiwiSaver members paid $480 million in management and administration fees in the year to March 2019.

This equated to 0.84% of the $57 billion invested in KiwiSaver funds.

In the previous year, members paid fees worth 0.86% of funds under management.

The FMA had expected fees to fall more than they have due to competition and as funds achieve economies of scale.

It will ask providers within the next year to demonstrate how they’re providing value for money.

It will get them to explain their investment styles and justify any higher fees being charged for services like active fund management or responsible investing.  

A report the FMA commissioned from consultancy Melville Jessup Weaver found KiwiSaver providers were charging higher fees than comparable UK fund managers. 

Investors appear to be reducing their risk as markets are volatile 

KiwiSaver members who switched funds during the year invested more in conservative funds than they did in growth funds.

A net $74 million was switched to conservative funds, while a net $13 million was switched to growth funds. Balanced funds lost a net $84 million as a result of investors switching.

Looking at switches involving funds that only invest in one type of asset class, it was again clear that investors became cautious.

A net $199 million was switched to lower-risk cash funds, while higher-risk share funds lost a net $21 million as a result of investors switching.

Investors are generally advised to pick funds based on their risk profiles and stay put, rather than try to play the market.

The risk for someone (who would only like to access their KiwiSaver in several years’ time) switching from a growth to a conservative fund during a downturn, is that they lock-in their losses. Then when the market recovers, it may take them longer to recoup their losses than may have been the case if they stayed in the growth fund.

Despite global financial markets being particularly turbulent at the end of 2018, investment returns still made up $3.8 billion of the $8.4 billion the KiwiSaver scheme grew by in the year.

Most, but not all, default providers are engaging more with their members

More than 52,000 default members made an active decision about their investment - up significantly from just over 28,000 in the prior year.

Three of the nine default KiwiSaver providers responded to calls by the FMA to increase their portion of "active choice" members.

However Mercer’s portion of active choice members fell from 8% to 5%, while ANZ’s remained at 11% and Booster’s at 15%.

While Westpac’s improved slightly from 2018, its portion of active choice members was the lowest of all the default providers at only 4%.

Fisher Funds had the largest portion of active choice members at 21% - a huge improvement from the 5% reported the previous year.

*Hot on the heels of the FMA report, Westpac announced that BT Funds Management will cut fees for Westpac KiwiSaver Scheme members from December 1. It will reduce the monthly administration fee for all members from $2.25 to $1, and reduce the management fee for its Cash, Default, Conservative, Moderate, Balanced and Growth funds by 0.1 percentage points.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Great to see more First Home Buyers getting on the property ladder. Kiwisaver is definitely a big help in terms of getting a deposit, especially while bank term deposits are so low, given the employer contribution of 3% (before tax) and annual Government contribution.

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As long as the ponzi house scheme is kept alive...pity for their retirement when the super is cut or worse still underfunded.

** The annual Government Contribution can't be used for a FHBer withdrawal, of course. It has to remain behind with a minimum $1,000 balance.

I'm pretty sure it's the $1K kickstart amount that had to stay behind. You can take everything in there but $1K.

On reflection, you're right! It did change somewhere along the way :)

Would the FHB have had the deposit if they weren't in Kiwisaver. I doubt it. KS not being used for its true porpose.

Owning their own home does increase their wealth/standard of living in retirement...

Well that depends. If it's bought at a price inflated by a debt bubble and expanded further by government supporting the demand side.

The only way to stop every incentive simply expanding land values is reimplementation of land taxes.

A paid off house vs ongoing rent at retirement is a no brainer. But yes, getting caught in an imploding debt bubble is a risk.

Buying a home *is* the true purpose of Kiwisaver as far as FHB are concerned.

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How else are they going to afford the huge ponzi deposit - but the Government will ratttle on how good kiwisaver is for saving for super when they retire - still with a massive mortgage around there neck.

I agree Nzdan
Compounding interest over a longer period of time - such as for retirement savings - is a valid argument. However, in this instance withdrawing one's KiwiSaver savings to buy a first house is a sound (and probably for most FHB a necessary) decision.
There is considerable scaremongering regarding financial survival in retirement, but prudent savers will still have plenty of time to save responsibly for retirement after purchasing their first home.
There is considerable criticism of the wealth of baby boomers. However, a common and significant feature of those comfortable baby boomers (who I know a number) is that purchasing a first home at the time was given priority over retirement savings. They committed to saving once they had the security of their first home and in many instances used their equity in their home to purchase rental property.
I am comfortable retiree, and to potential FHB, I see no issue with using the maximum of your KiwiSaver savings provide one keeps their KiwiSaver active to take maximum advantage of the freebie tax credit and employer contribution making that the better return than paying of mortgage principal. You face the current challenges in providing a home and security for your family, and for most, the challenge of retirement can be addressed once that immediate challenge is addressed. That is being realistic and prudent.
Unfortunately, fund managers who recommend that KiwiSaver's savings should remain intact for retirement have a vested interest is saying so.

"Then when the market recovers..."
Tell that to the Japanese who stayed put in 1989 at 38,000 and who now see their Nikkei index 'recovered' to 21,000!
Sure, there's 'past performance' to look at, but if what we have in the World economy today tells us anything, it's that (1) we haven't see this mess before, so who knows how relevant 'the past' is, and (2) we are all headed towards a Japanese-style economy.
So. stay put, by all means, but don't be surprised if the Cash-Only funds end up being the better investment over time; even if those cash returns turn negative. (NB: A clue..."A net $74 million was switched to conservative funds". That means a net sale of 'stocks' and what does that do to the price? makes it fall, and so the Cycle kicks off)

"A net $74 million was switched to conservative funds". That means a net sale of 'stocks"

In isolation, your comment is correct but ultimately misleading & seriously lacking understanding of how KiwiSaver functions.

When looking at the aggregate impact of KiwiSaver on the Australiasian sharemarkets it's pretty clear there is net buying, not selling. Australiasian makes up 15.7% of total assets of $57bn = $8.95bn .... looking at last year the figures were 15% of 48.6bn = 7.3bn. So there you have it, a net $1.65bn poured into Australiasian shares thanks to KiwiSaver.

What about the international shares you ask? A net 2.5bn poured into them as well.

What about the international shares you ask? A net 2.5bn poured into them as well.

A whole lot more seems probable if pension under funding in Europe's largest economy is to be avoided.

Good Morning from #Germany where pension crisis is waiting to happen: Dax comps had €120.2bn in underfunded pension liabilities at end-2018. VW's €33bn represented largest shortfall. Siemens 2nd w/€8.9bn pension deficit, Allianz 3rd w/€8.9bn, Bayer 4th w/€8.4bn, BASF €7.4bn Link

I wonder if that has anything to do with mark to market accounting. By that I mean assets are valued annually capturing ups and downs of market, while future liabilities are calculated maybe by a present value for a future forecast amount?

The discount factor applied to the forecast amount is material. If negative values apply, I guess one can only expect compound deflation to increase the buying power of future cashflows to offset up front losses in today's currency value, otherwise significantly higher capital commitments to pension funding are imperative today.

..the iron law of investing is that a security is nothing but a claim on a future stream of cash flows. Valuation is a crucial determinant of long-term returns. The higher the price an investor pays for those cash flows today, the lower the long-term rate of return earned on the investment..

The corollary is also true. The lower the long-term rate of return demanded by investors, the higher the price moves today. So clearly, changes in investors' attitudes toward risk will strongly affect short-term returns. If investors become more willing to take market risk, it is equivalent to saying that they are demanding a smaller risk premium on stocks (that is, a lower long-term rate of return). Prices rise as a result. Now, the fact that current stock prices are higher also implies that future long-term returns will be lower, but that's part of the deal.Link

Maybe the problem is that the models all assume positive rates therefore we are in uncharted territory. Maybe assets are going to lose value but from what I’m seeing there’s quite significant inflation. Food, rates, insurance being the main contributors. Makes me doubt the value of KiwiSaver because of this. As for negative yielding bonds I understand that funds have to hold a certain % of bonds. I wonder if this helps keep rates artificially low?

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Labour need to stick to it's main policies in making property more affordable "Create a level playing field for first home buyers". There is a way to do this without First Time Buyers having to withdraw all their Kiwi savings and get in to debt up to the hilt. Simply tax the by product of Speculative Investors - tax the empty homes in our larger cities and use the revenue to help Fist Time Buyers by building new homes etc...

CJ, building new homes doesn’t reduce prices, quite the opposite if there is demand.
First home buyers should be buying existing homes and working their way up the property ladder, as that is the way to build equity and wealth.
Housing in NZ is very affordable and especially now with interest rates at historical lows.
I am not sure why the majority of contributors on interest.co are Aucklandites, maybe it is because they are never happy with their own situation, and Interest.co gives them some sort of support from others who don’t own a home.

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Very affordable? The world disagrees

I own a home. I just paid more in deposit than what my parents paid for a far nicer house in a far better suburb 10km closer to the CBD. Low interest rates make servicing the mortgage a breeze, but a 20% deposit at a time of low wage growth and high living costs is huge ask.

"building new homes doesn’t reduce prices, quite the opposite if there is demand."

Umm... no.

"building new homes doesn’t reduce prices, quite the opposite if there is demand"
Now TM2 put that glass pong down, you have smoked enough for one day! Now go out and buy some more houses and make sure they are under market value!

"Very affordable"

My dad in the US sent me a link to the property next door to his that's been on the market for a month or so. It's in a great neighborhood with very low crime and great amenities. It's a 3 bedroom 2 bath house on 2387 square meters with a 1 1/2 car garage, with a full basement. It was built in 1934 and renovated in 2004. It's been owned by the same family since it was built. Average income in the area is $75,617USD/year ($120,000 NZD).

The price for this? $99,900 US (about $160,000 NZD). So tell me once again, how affordable is housing in NZ compared to the rest of the world?

I would move there in a heartbeat if my wife wasn't so insistent on living here (she grew up in NZ).

Sounds wonderful.
How much state and local property taxes (the US version of our "rates") in $US would the owner have to pay per year on this $US99,900 property? (From what I hear, property taxes vary widely by state, and can be a lot higher as a percentage of market value than rates in NZ.)

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The original point of Kiwisaver was to reduce the burden of funding superannuation for future taxpayers .... wasn't it ?

... what a crock to prostitute KS to become a backstop for our property bubble ...

Shame on the Gnats for once again buggering up a national super scheme ... and shame on Taxcinda for not undoing the damage the Gnats have done ...

Agree - cannot understand why Jac kinda cannot at least reverse JOnkeys tax grab on employee Kiwisaver deductions? Unless some sort of tax is reduced or deleted I will vote TOP again.

Government tax take from KiwiSaver up 20% last year from KiwiSaver accounts. They are quick to critisise the providers regarding fees but tax is having an huge impact as well. There is a quick fix if they are so concerned about KiwiSavers earnings being eroded...

Indeed. National didn't help by slapping tax on the employer contributions either, reducing them by a third.

Future KiwiSaver balances eroded by today's tax to pay for today's superannuants

Jenee any indication average age of those withdrawing funds for first home. I appreciate that the published report provides no details , other than average withdrawal higher than overall Kiwisaver average.

Good question. But I only have access to the data in the report, so can't help you there sorry. It's certainly something worth investigating in the future.

Kiwisaver withdrawals, combined with trust fund/bank of mum and dad contributions, are the only thing keeping the lower-mid end housing bubble inflated IMO. If I hadn't been in Kiwisaver the past 6 years, I wouldn't have a chance of scraping a 10% deposit at the current housing prices, let alone 20% for the additional security. You could point at me and say 'silly millennial you spend your money on avocados instead of saving', but the reality is if we all did that then businesses would go bust and it'd be a right kerfuffle anyhow.

Sadly, instead of sitting back and letting the situation the boomers have created crumble and fall down, my kin are going all-in on getting into the market because that's what their parent's would do... that's what investors would do... that's what anyone with a vested interest in sustaining capital gains would do. And fair enough, shelter is a basic human right. Rent is now often higher than mortgage repayments. Not everyone is prepared to cross the ditch or beyond. But wow, what a scheme.

https://getyarn.io/yarn-clip/f728ec23-9f3c-4bd2-931e-4212eb3c5fed

It's not Avocados anymore, see Kellsbells comments in this article. It's now $70 shampoo, $200 outfits and $500 kids birthday parties.

https://www.interest.co.nz/property/102019/overall-sales-rate-48-barfoot...

by kellsbells | 8th Oct 19, 12:42pm
You all go on about first home buyers being priced out of the market but from my point of view (mid thirties single mother, multiple property owner) I see so many people who could afford a property but lack the financial intelligence and willingness to scrimp for a while to get to a position to be able buy a property. I know so many people "on the bones of their asses" who in the next breath are telling me about the $200 outfit or the $500 kids birthday party they threw... You all should argue about how to get to the root of this issue - why kids are not being taught this basic stuff at school??!! I sure as hell am educating my kid to know about capital gains, investing and how to pay off a mortgage quickly and to use debt to your advantage.

Ah yes, let's ignore the fact that houses are many times more multiples of income because there are a handful of idiots who spend recklessly, which there totally haven't been in previous generations at all.

Also ignored the recent coverage we've seen suggesting younger Kiwis are actually saving at a higher rate than many previous generations.