A NZ$14b retirement savings time bomb?

Investing

KiwiSaver provider ANZ Wealth calls for end to permanent default funds, suggests a lifestages fund that adjusts for age and risk

19th Jan 12, 10:49am by Amanda Morrall

By Amanda Morrall

New Zealanders languishing in conservative KiwiSaver funds, the least risky and traditionally lowest returning portfolios, could be costing themselves NZ$72,000 in savings over a lifetime of investing creating a potential NZ$14 billion national savings shortfall collectively, the country's largest provider by funds under management suggests.

Calling the situation a NZ$14 billion time bomb, ANZ New Zealand today called on financial regulators to adjust the national savings scheme so that members put into default funds would be transitioned into so-called life-stages funds that adjusted for age and risk.

ANZ, with about NZ$2.3 billion under management among its KiwiSaver schemes, estimates that 191,000 New Zealanders are at risk of a self-imposed savings deficit. The figure is based on the total number of 15-24 year olds in Statistics New Zealand's data base (638,000) multiplied by the estimated 30% of KiwiSavers' who are presently in default funds.

John Body, managing director of ANZ's Wealth, said the magnitude of the problem would likely grow worse over time as enrolments grew. He also described the situation as "a major problem" and a discussion that has been missed through all the debate over KiwiSaver.

“Our research demonstrates that over the long-term, investors are likely to be significantly better off through the life stages approach than with the current default conservative option,” Body said.

"If we do nothing, it will cost New Zealand billions of dollars and seriously compromise the standard of living for a generation of retirees.”

A lifestages fund differs from other categories of funds in that it automatically adjusts asset allocation accordingly to age whereas a conversation fund or a growth fund would more or less maintain its composition. A conservative fund is typically weighted 20/80 in terms of an equities to cash and fixed interest split whereas a growth funds is 80/20 in favour of shares, which are regarded as the riskier investment but higher return yielding investment long-term. (For more in lifestages fund see KiwiSaver Q&A story here).

Body said whilst conservative funds were appropriate for many investors, predominantly those closer to retirement and those saving for a first time home, younger KiwiSavers facing 20, 30 years in the workforce would likely be better off in alternative funds.

Over the medium to longer term – and this is what the vast majority of retirement savings plans are designed for - conservative funds can seriously disadvantage the saver.”

Mr Body said this was a major problem that was missed during recent debates around retirement savings.

Investments Savings and Insurance Association CEO Peter Neilson said he welcomed the suggestion.

"Defaulting into conservative funds has done a good job in preserving capital in the most difficult investment environment in 100 years but it is not the best place to be long term.

"Younger KiwiSaver investors, as the ANZ report shows, will leave considerable “money on the table” if they don’t have a more growth orientated investment strategy long term reverting back to a more conservative stance closer to retirement. As our population ages and we live a lot longer after reaching 65 we are going to need a bigger KiwiSaver retirement pot come 65."

The ANZ KiwiSaver Scheme and the National Bank KiwiSaver Scheme (which is part of ANZ's business) already use the life stages investment fund selection as the default setting for people who do not select their own investment fund when they enrol direclty with the provider. Individuals who do not actively select their own scheme provider when automatically enrolled through their employer are put into one of six default schemes run by AMP, AXA, Tower, Mercer, OnePath and ASB.

The change that ANZ is calling for would apply only to those default funds.

Body, at a press conference Thursday where the proposal was made public, said ANZ officials would be meeting with politicans today to make a case for lifestages funds replacing permanent default conservative funds.

It is estimated that approximately 30% of the 1.8 million KiwiSavers are in default funds.

While the proposed fund restructuring plan could make a substantial difference to retirement nesteggs, it would also benefit default providers themselves as there is a sliding scale of fees associated with funds based on their exposure to the equities market and other growth assets.

Simon Botherway, general manager of investment for ANZ, conceded default providers would benefit peripherally from a revamp in fund composition but said the fees, as least with respect to ANZ, were relatively modest across the board. At ANZ, conservative and growth fund fees were separated by an average of 20 basis points. The management expense ratio (MER) on a conservative fund in the ANZ scheme is .54% and .73% on a growth fund.

Body said ANZ factored in the fee creep, as well as taxes, in its projections on younger KiwiSavers coming out NZ$72,000 ahead if they were put into lifestages funds as opposed to conservative funds through their working life.

KiwiSaver case study: Conservative fund vs life stages investment funds supplied by ANZ

Jonathan is a 25 year old sales coordinator from Wellington who recently signed up for KiwiSaver and was placed into a default scheme. Jonathan earns the average wage, $36,000*, and pays the current minimum contribution of 2% of his salary until he retires, and his employer contributes 2% of his salary. In his current conservative fund, he stands to accumulate about $248,000 in his KiwiSaver account by the time he turns 65. But if he had been placed into a life stages option, which adjusts the mix of investment allocations according to his age, he would have accumulated around $320,000 – a difference of $72,000, according to median projected returns. Note: *based on Statistics NZ figures for average wage, calculation assumes wage increase based on inflation of 2.5% per annum over forty years and a “Wage Alpha” that increases someone‟s pay as their skills increase over time . The proposed increase from 2% to 3% of salary has not been taken into account in this example.

Botherway, elaborating on the modelling, pointed out the fact that whilst the minimum returns that could be expected from a lifestages plan were in line with average returns of a conservative fund, the median returns were separated by $72,000.

The following are the forecast returns built into their projections:

Forecast returns	Growth	Balanced growth	Balanced	Conservative Balanced	Conservative	Cash
After fees and tax	5.98%	5.28%	4.59%	3.89%	3.19%	1.86%

ANZ did not have figures on the number of default fund invested KiwiSavers who have switched out of those funds after enrollment but said they were low.

For example, of more than 78,000 default fund KiwiSavers at ANZ alone, just over 100 had moved into a lifestages fund.

Both Body and Botherway expressed renewed concerns about low levels of financial literacy in New Zealand, speculating they were lowest among those who ended up in default funds.

Ironcially, over the past four years, average returns generated by default funds have beaten their peers, a trend that most in the industry have chalked up to dumb luck and circumstance.

*Updates with quotes and figures. Adds quote from ISI CEO

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57 Comments

by ngakonui gold | 19th Jan 12, 11:46am 1326926801

'kiwis could be costing themselves 72000k

'Thats possibly better than losing the lot with you guys (they who know better)

by Wolly | 19th Jan 12, 11:48am 1326926892

"... whereas a growth funds is 80/20 in favour of shares, which are regarded as the riskier investment but higher return yielding investment long-term"

This amounts to utter rubbish...the statement is meaningless drivel...

"regarded as"...by whom?....just the sort of bollocks the regulators ought to be ridding the financial sector of.

A little bit of simple research will show just how "successful" said investments over the last 40 years have been in the USA...or indeed in NZ.

Peasants need to understand it all comes down to when you invest and when you sell....

Don't take my word on it...go look at the investment pension returns in the UK....that should open your eyes.

by Ms de Meanour | 19th Jan 12, 3:12pm 1326939158

"A little bit of simple research will show just how "successful" said investments over the last 40 years have been in the USA...or indeed in NZ."

I'm genuinely interested to carry out this little bit of simple research, and puzzled as to why you and others are declining to point me to the data that will so easily prove your point.

by JB | 19th Jan 12, 12:22pm 1326928963

Wolly - we should remember the words one Warren Buffett:

What's good for the croupier is not always good for the gambler.

The assumption that equities will always return more than bonds is simply utter rubbish as any reasoned analysis of past investment returns will show over long time frames.

Yet everything these guru's do is predicted on that one flawed assumption.

ASB conservative can't even earn their own term deposit rates

Simpy sticking with good quality NZ bonds held to maturity over the last few years with no FX risk eg Mighty River, Vector, AK Airport, Contact, Genesis, Fletcher Building, Fonterra has and will deliver over 8 % pre-tax with very low risk.

No advisers required.

by Ms de Meanour | 19th Jan 12, 12:42pm 1326930138

"The assumption that equities will always return more than bonds is simply utter rubbish as any reasoned analysis of past investment returns will show over long time frames."

Where can we find the data, or any examples of such reasoned analysis? What returns have equities and bonds historically delivered in NZ? Amanda please?

by Wolly | 19th Jan 12, 12:50pm 1326930642

Plenty of data to see that the claim is rubbish without the rider that it all depends on when you buy and when you sell...which kind of turns to mush when you are one tiny account inside a monster fund...which is the discovery being made by many a Pom who has seen his/her payout slashed with bigger cuts to come. Same will be true for Kiwi suckers.

As I have said before, peasants would do better to make their own investments...buy their own shares...their own gold....their own whatever...at least they can then withdraw what they want whenever without sucking up to some sodding fund manager....or indeed paying for the fund bosses fabulous lifestyle.

by Ms de Meanour | 19th Jan 12, 12:53pm 1326930789

I'm sure that there is plenty of data, I am just asking to be pointed to it. Something like a chart showing the returns on bonds and equities in New Zealand each year for as many years as there are records of it.

by JB | 19th Jan 12, 12:50pm 1326930634

Gross Set for Record Book as Manager of Biggest Fund in History

By Charles Stein

Dec. 9 (Bloomberg) -- Pimco Total Return Fund, run by Bill Gross since its inception in 1987, is set to become the biggest mutual fund in the industry’s history as individual investors mostly sit out the 2009 stock rally for the safety of bonds.

Based on the pace of current inflows, Gross’s bond fund this month may surpass the record $202.3 billion reached byGrowth Fund of America in 2007, according to researcher Morningstar Inc. Total Return managed $199 billion at Nov. 30, while Growth Fund, which buys stocks, had $153 billion.

Total Return took in $42 billion of new cash this year through October, four times more than any other U.S. mutual fund, Morningstar data show. The growth underscores the reluctance of individuals to invest in equities even after U.S. stocks surged 61 percent from a 12 1/2-year low in March, and the appeal of Gross’s returns, which beat all but four similar funds in the past decade.

“Last year was a time when many funds got burned, but the biggest fund of all did fine,” Russel Kinnel, director of mutual-fund research at Chicago-based Morningstar, said in a phone interview.

Gross, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, returned 4.8 percent last year while the Standard & Poor’s 500 Index, a benchmark for the largest U.S. equities, lost 37 percent including dividends.

Investors added a net $297 billion to bond funds in the first 10 months of 2009, compared with $12 billion for stock funds, according to Morningstar.

Return Since Inception

Total Return climbed an average of 8.5 percent annually including dividends from its opening in May 1987 through Dec. 4.

That compares with the gain of 7.4 percent by the Barcap U.S. Aggregate Total Return Index. The Pimco fund has returned 14 percent this year.

The size of Gross’s fund, already the largest based on current assets, could pose problems because many investments may be too small to have a meaningful impact on performance, said T.J. Marta, chief market strategist at Marta On The Markets LLC, a financial-research firm in Scotch Plains, New Jersey.

“You can’t cherry-pick the best investments because you don’t get enough return for your buck,” Marta said.

Bond markets are sufficiently large and liquid to accommodate a $200 billion fund without hurting returns or restricting selection, Jeff Tjornehoj, senior research analyst at Lipper in Denver, said in a telephone interview. The U.S. bond market had $34.3 trillion of debt outstanding in the second quarter, according to data fromthe Securities Industry and Financial Markets Association, a New York-based trade group.

Advantage of Heft

Gross said size would be a legitimate issue if the fund underperformed the market for several years. “For over 20 years now, it has not been,” he wrote in an e-mail.

The fund’s heft creates advantages, including better access to the issuers of debt and the ability to receive more “attractive new-issue allocations,” Gross said.

The fund can hold derivatives, which are securities whose value is derived from an underlying asset such as debt, stocks or commodities. Derivatives can expand the universe of investments for a fund.

Gross increased his holdings of government-related debt in October to 63 percent of the fund’s assets, the highest in five years, according to the most recent data available on Pimco’s Web site.

The “systemic risk” of new asset bubbles is rising as the Federal Reserve keeps interest rates at record lows, Gross wrote in a commentary published last month.

Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

Mortgage Holdings Fall

Total Return’s holdings of mortgage debt fell to 16 percent of the portfolio by market weight from 22 percent in September, matching their smallest percentage of the assets since May 2004. Investment-grade corporate securities rose to 18 percent of the fund from 17 percent, while high-yield bonds fell to 1 percent from 2 percent, according to the firm’s Web site.

Total Return rose 7.7 percent annually in the 10 years ended Nov. 30, according to Morningstar. The four comparable funds with better gains are: the $9.3 billionNatixis Loomis Sayles Investment Grade Bond Fund, which returned 9 percent; the $5.8 billion Delaware Diversified Income Fund, up 8.8 percent; the $403 million Frontegra Columbus Core Plus Fund, which increased 8 percent; and the $11.9 billion TCW Total Return Bond Fund, which returned 7.9 percent.

‘Rare Trait’

Pimco Total Return started the decade with $28 billion in assets. As the fund grew, Gross shifted from picking individual bonds to placing bets on specific categories such as mortgage, corporate and government bonds, said Eric Jacobson, director of fixed-income research at Morningstar, which gives the fund its highest rating of five stars.

“It’s a rare trait to manage at that level,” he said.

Gross’s comments on the economy, interest rates and the bond market, made on Pimco’s Web site as well as on television and radio, are closely followed by investors.

In an October 2005 investment commentary, Gross predicted a “slam-dunk” scenario in which housing prices would cool, leading to a decline in “funny-money” lending practices and home equity, a weakening of the U.S. economy and a reduction in interest rates by the Federal Reserve.

“If real housing prices decline in the U.S. in 2006 and 2007, a recession is nearly inevitable,” Gross wrote. A recession began in December 2007, according to the National Bureau of Economic Research.

Little Junk

He’s also known for avoiding high-yield, or junk, bonds. The average credit rating of bonds in the fund is AA, the third highest on Standard & Poor’s scale, with 4 percent of assets in junk, according to the fund’s Web site.

Gross, 65, is a stamp collector and has said he turned $200 into $10,000 while playing blackjack for four months in Las Vegas after college. He was born in the Ohio steel-company town of Middletown.

A graduate of Duke University in Durham, North Carolina, with a psychology degree in 1966, he spent three years in the Navy and served in Vietnam. Gross joined Pimco after earning a Master of Business Administration degree from the University of California in Los Angeles in 1971.

He began using yoga more than a decade ago and credits his meditation sessions with clearing his head and helping him absorb unexpected news, such as a Fed half-point interest rate cut in January 2001. The news caught him in the middle of a “sun salutation,” which softened the blow, he said at the time.

Total Return attracted $115 billion since the start of the decade, the most of any mutual fund. Growth Fund of America, run by Los Angeles-based Capital Group Cos., was second with $99 billion. Pimco, a unit of Munich-based insurer Allianz SE, managed $940 billion in assets as of Sept. 30.

“They’ve got a well-known visible manager, a great brand and they’ve been successful,” Tjornehoj said.

To contact the reporter on this story: Charles Stein in Boston atcstein4@bloomberg.net.

Last Updated: December 9, 2009 00:01 EST

by Ms de Meanour | 19th Jan 12, 1:04pm 1326931489

No, sorry, that is a report about how one fund in the US has performed. What I thought it would be easy enough to show would be a data series showing how bonds and equities have done overall/pn average in New Zealand.

by Kimble | 21st Jan 12, 1:06am 1327061173

If it helps, I think the earth shattering data they are referring to is that for a period recentkly the 40 year return of bonds exceed that of shares, by a small amount. Google 40 year bonds equities, and you should be able to find it.

Of course, the 40 year bond returns included a drop in yields from around 8% to below 2% (or something like that). So, unless you expect that to happen again...

-6% yields anyone?

by Wolly | 19th Jan 12, 1:01pm 1326931266

The sick aspect of this Mist42nz is that with a little bit of real effort by Labour they could have working a system that provided peasants with guidance and help for a small fee to encourage Kiwi to DIY their savings....Those who decided to hand their loot to a fund boss could still do so....

This didn't happen because it was never Labours intention to help Kiwi families climb out of poverty traps and ignorance. The finance company farce clearly displayed labours uselessness.

Then along came National and the KS scheme made them very happy...a steady flow of capital for friends and it cost no more than a promise about the future.

Kiwisaver is a Ponzi scheme.

by Wolly | 19th Jan 12, 2:41pm 1326937311

Nope you hit the crap on the head....

by Kimble | 21st Jan 12, 1:03am 1327060993

"- pays mature "investors" from new investors premiums"

KiwiSaver pays mature investors from those investors savings. 0/1

- has no real deliverables

Through KiwiSaver you are buying shares or debt in companies that produce real things. The value of your investment is derived from the perceptions of the current value of all the future profits from producing those real things. 0/2

- has significant operations/operator fees that because of previous line aren't risk or performance based.

Given the previous line was debunked, this one shouldnt count either. But I wont dismiss it so easily. I will dismiss it by pointing out that payment for most services arent performance based. 0/3

- promises higher than reasonable predictable profits or bonus

10%pa doesnt seem out of line. And thats about as high as it gets. Certainly nothing like the 25%pa, or the 100%pa predictions we normally associate with ponzi schemes. Even if you think 10% is too high, it would be hard to say that it would exceed a reasonable prediction by more than 3%. 0/4

- ignores real risk

Who ignores risk? Certainly not the people making predictions of average market returns. The ups and downs of the market are accepted, understood, and addressed by real financial professionals. That is why they stress long-term investing; to reduce the impact of large short-term fluctuations. 0/5

- requires significant "up front" commitment

There is no up front commitment at all. KiwiSaver does not require any initial payment from investors. You can have a KiwiSaver account with as little as $1000. 0/6

- managed by untouchable senior or "management level" individuals

And you think because the investments are managed by people called "investment managers" that this somehow satisfies this condition? 0/7

- offers no bonus or advantage beyond membership

And you think that because KiwiSaver schemes have members that this somehow satisfies this condition? There are undeniable bonuses, and significant advantages beyond mere "membership".

0/8 and I am being generous. I could just as easily have given you -8/8 for all the errors you made. Did you miss anything? Yes. You missed every single one.

by Wolly | 21st Jan 12, 6:34am 1327080848

Good try Mr English... oops kimble...but no prize for you..

Kiwisaver stinks. It smells of a taxpayer slice of pork without which most suckers would not have joined....the suckers and all other taxpayers have to fund the pork....

The fund managers enjoy an endless stream of wealth for doing sweet FU. They are being paid fees for investing that pork..believe it or not!

Those in KS see no reason to learn to invest, and resort to believing the BS that they are being looked after.

Key has held on to Clark's vote buying KS scheme because he and National recognise it as a vote winner for them if they keep it going.....their decision is not about what is best for Kiwi families, evidenced by their continued landlord subsidy that distorts property prices...evidenced by property remaining seriously unaffordable for Kiwi families...evidence by the govts determination to protect the bankers property bubbles at all cost....evidenced by the govts direction to Bollard that the RBNZ do everything possible to keep the game going regardless of LVR levels or bank leverage risk.

by Kimble | 21st Jan 12, 11:15am 1327097701

So other tax payers are funding them? Not other investors? So not like a ponzi scheme?

Those in KS may choose not to learn to invest, but why should they? They are paying someone else to invest for them.

Are you arguing that because the fund managers dont do their work for free that this makes KS a ponzi scheme? Or is it that anyone hires a fund manager at all?

Your last paragraph actually has nothing to do with KS at all. It is a rambling mess.

Not a single feature of a ponzi scheme checks out for KiwiSaver.There are valid criticisms of KiwiSaver, but that it is a ponzi scheme is not one of them.

by moa man | 21st Jan 12, 7:36pm 1327127782

Here is a valid criticism of Kiwi Saver.

It involves taking my tax money, to pay retards - who can't be bothered looking after thier own finances , to employ some shiny suit , who in turn, generates a negative return for said retard.

A lose/lose situation for all involved - apart from the shiny suit guy.

by Gummy Bear Hero | 21st Jan 12, 7:59pm 1327129197

I agree with your synopsis , up to one point : Retards ! ...

....KiwiSaver doesn't just reward the undeserving retards , it's not only the politicians in KiwiSaver , some of the public signed up too ........

by moa man | 21st Jan 12, 8:09pm 1327129747

Yeah, perhaps calling them retards was a bit strong. But what is the correct term for a person who uses this thing called money, every day of their life, to pay for bread, milk, rent,mortgage or whatever, and can't be arsed to think about what will happen when they retire?

by Money Man | 22nd Jan 12, 10:10pm 1327223412

Kimble,

I agree that Kiwisaver has some faults but those who belive it is ponzi scheme have no idea or just choice not to believe.

I and my family are all in Kiwsaver and I have been in Staff Super schemes in the past. My employer pays me an extra 2% which goes into my KS scheme. If I wasn't a member then I woudl get thta 2%.

My dad was in the State Servents Super Scheme and I am sure he is happy with his $2,000 per month direct credit into his account. He contributed to the scheme for many years and now gets his return. Despite being a reasonally bright person he didn't have the time or knowledge to do the DYI investing.He found it more rewarding to be involved in community and voluntary work in his spare time than counting the pennys.

Now Mum and Dad live in reasonable comfort and don't have a bitter and twisted view of the word.

by Roger Witherspoon | 19th Jan 12, 1:27pm 1326932838

"Kiwisaver is a Ponzi scheme."

Stewth Wolly you are on fire these days. Another stunning summary in five words.

Sadly, the primary purpose of regulation is to protect the incumbents from new competitors..

It's very important that our most excellent corporate executives, politicians, bureaucrats and financial intermediaries can continue to award themselves generous compensation on the basis of their most excellent skill levels which are truly a wonder to behold. Your suggestion that they are justs pigs at the trough is totally out of order. I mean, who are you to judge your betters?

by Wolly | 19th Jan 12, 1:42pm 1326933770

Shame on me....

by skudiv | 19th Jan 12, 1:36pm 1326933399

Obviously ANZ hasn't seen the latest Kiwisaver performance, low risk funds PWNT everything (except gold). Probably right that most Kiwis have no idea what is going on with anything.

These big banks could set up a loan product, that uses your kiwisaver funds to offset the interest on debt. Which would yield far higher then most funds, and would be very easy to manage and require very low fees. But that wouldnt exactly boost profits would it?

The only way to make a real return is from the govt tax reduction, and the employer contribution, which is why most people say "join, it's free money." Not realising that nothing is free, and the fund managers are rubbing their hands together, greedy for more.

by Waripori | 19th Jan 12, 3:22pm 1326939772

Some of the comment on here is just plain silly.

Kiwisaver is just a framework that makes it easy and advantageous for individuals to save for retirement. I suppose it is possible for one fund or another to be a Ponzi scheme but lumping them all together betrays either a complete lack of understanding or a nasty pain in the gut that only be soothed by expelling lots of bile.

The only one of the 8 characteristics of a Ponzi scheme that might fit some Kiwisaver schemes is number three relating to fees but the default providers in particular have signed up to a fairly low fee regime.

I have had my own modest investment in a defensive fund since inception and it has done OK but when interest rates do start to rise internationally we are going to see a collapse in bond valuations. The time to move to equities may not be far away.

by Justice | 20th Jan 12, 2:13pm 1327022036

On a lighter note: Can we have the microphone moved please? ;-)

by Gummy Bear Hero | 20th Jan 12, 2:35pm 1327023341

Yeah , we couldn't hear John clearly enough ....... and it blocked " the view " ...

by Kimble | 21st Jan 12, 12:36am 1327059383

"The assumption that equities will always return more than bonds is simply utter rubbish..."

Which is why nobody makes that assumption other than know-it-alls who bravely defend us from fierce and ferocious strawmen.

"Yet everything these guru's do is predicted on that one flawed assumption."

Except it isnt. You dont know what you are talking about. The most charitable thing I can say about your statements would be that they show you have misunderstood a simplified explanation and then assumed yourself an expert.

If there is any assumption that may come remotely close to the one you falsely accuse others of making, it is that equities are expected to out-perform bonds over a greater number of long time periods than those in which bonds out-perform equities. Nothing about "always return more". Observations of bonds sometimes beating shares prove nothing.

by Black Celebration | 22nd Jan 12, 2:24pm 1327195474

This is just greed. There will be many people that will never, ever, look at their returns - this suggestion seems to want to take advantage of this. All the more reason to keep their money safe. The money belongs to *them*, not you - Mr Provider. Leave it alone.

There is nothing wrong with KiwiSaver members being defaulted into a conservative option and then moving more into shares if they choose to. They can do that now, very easily - when they're ready. Those that stay conservative may do so for a load of reasons. I know this beggars belief to the readers of sites like this but not everyone is after the highest returns.

Fund management charges for equities is (generally) higher - let's say 50 basis points. I think this is the "missed opportunity" that providers like this are referring to.

Calling it a "debate" is an attempt to make the idea sound less greedy than it is.

by Kimble | 22nd Jan 12, 7:15pm 1327212936

There IS something wrong with investors being put into low risk investments without any consideration of their time to retirement. And that is, that it reduces their expected return. You say that some people are fine with this, and I agree. But those people are at least aware of the trade-off. Others arent.

It isnt particularly brave to assume that there would be more people regretting the lower return than appreciating the lower risk at retirement. (And you must consider risk over decades, not months to truly appreciate the issue.)

by Black Celebration | 22nd Jan 12, 10:30pm 1327224651

I don't agree that a KiwiSaver member who is automatically enrolled should be defaulted into the most expensive and risky environment for their own long-term good.

There are billions of dollars in bank term deposits that might be served better elsewhere over the long term. But they remain in term deposits until the investor says otherwise. Which is how it should be.

There are graphs that tell us share markets have outperformed cash, bonds and property over the long term historically - yet these always assume a before tax and fees position (they can't be done any other way, to be fair).

We always tell people that they shouldn't look at historical performance to base their future investment decisions, yet this proposal is doing exactly that.

by Kimble | 23rd Jan 12, 10:41am 1327268465

Historical returns generally arent used in forecasts. At least not in the rudimentary way you imply (that future returns are assumed to be the same as the past). The charts showing historical returns simply show that what is expected in the future (equities generally out-performing bonds) is not unreasonable. It must be in the realm of possibility, because it is in the realm of experience.

I read what AMP is saying above as meaning that a person would be given an asset allocation depending on their age / time to retirement. So to be clear, we are not discussing putting a 55 year old employee into a leveraged emerging market equity fund. When the person gets closer to retirement, the allocation changes to more bonds and cash. The chances of someone near retirement suffering a massive loss is reduced.

Imagine you are talking to every KiwiSaver investor at retirement. Which do you think you would be most likely to hear. "I didnt pay attention to my KiwiSaver until now, I got put into a default fund and stayed there..."

A) ", it was all cash, which has meant that my savings havent even kept pace with inflation. I missed out on tens of thousands of dollars! The government should do something to make up for their poor decision!"

B) ", it was in mostly equities. It suffered a lot of ups and downs, but I wasnt paying attention so I didnt even notice. Still, I am annoyed that the government put my money into something volatile that, if I had been paying attention, I would have chosen not to be in!"

by Black Celebration | 23rd Jan 12, 12:14pm 1327274066

Yes, AMP's Lifesteps does gradually reduce the risk as one gets older - the funds are switched at certain birthdays. It does have a ring of logic to it - but I do maintain that people should agree to this kind of thing rather than having it thrust upon them.

To continue your theme, I would suggest additional words -

A) ...but then again, my contributions were doubled by my employer and enhanced by significant additional crown contributions - so overall I am well ahead, even though I was in a low risk fund. When sharemarkets suffered downturns, my capital was protected and this was good because I may have needed that money to help buy my first home. It turns out, in hindsight, I should have transferred to a growth fund on date X and date Y. That's my fault. I can't blame the Government because I had every opportunity to switch. But there are no guarantees and I noted that the providers all have warnings along those lines. I need this KiwiSaver money. I tend to be more adventurous with money that I can afford to lose.

B) ...I had no idea I was in such a volatile and expensive fund in the early years. They tell me that I have ended up with more money in my fund than I would have if I had stayed in a conservative default fund, which is great. But how much more have I got? 5%, 10%, 50% ? I don't know. I'll have to work it out myself. I hope that once I factor in the much higher management fees that I have been rewarded for the risks I have unwittingly taken. Was switching out of equities on my significant birthdays the best time to do it? For example, if I was 50 in late 2008, that would have been a bad time to cash up my equities holding - but my fund would have done that, regardless

In summary, the B) person may be happy if it turns out that he ends up with more money, but I sense he will be less happy when he does the mathematics.

by Kimble | 23rd Jan 12, 1:26pm 1327278419

A1) Buying a new home does add a wrinkle to the changing asset allocation structure. But it is debateable whether you should be able to use your KiwiSavings for investing in the property market in the first place.

A2) Relying on individuals taking personal responsiibility for the misallocation is just wishful thinking. It would be the least likely response.

A3) People are not likely to view the extra amount they got from their employer as an enhancement. It immediately becomes their money, and they would treat it as such. Thought experiment: what would people say if the government passed a law allowing the employer contributions to be reclaimed upon justified immediate dismissal? Also, people are correct to assume that money is theirs from the outset. Employers have very quickly changed their sums to include KiwiSaver in their costs of employment. So it is already considered part of someones remuneration. This has an effect on non-KiwiSaver salary.

B1) Investors could easily see how much they have gotten. As long as it is more than cash, they would be fine with it. If a person is only looking at their KiwiSaver at retirement, then it is only that value at retirement that they will care about. Their ride to the final destination wont matter to them, because they were asleep for the entire journey.

B2) The fees would be accounted for in their final balance, so are not a factor. Is anyone going to say, "If I was in cash I would have made much less money, but I would prefer that as I also wouldnt have had to pay a lot of fees!"

B3) Switching out on their birthdays (probably a specific date for all investors, to make things easier) is arbitrary, and may have resulted in a lower return. But the allocation to equities decreases over time, so it will only be opportunities they would have missed that would cause regret. That is, they will regret not being in a more aggressive fund. This undermines your other argument. B may have earned more, and they may regret this. But isnt your argument that people ought to earn even less in the cash-like default fund?

Your best argument would be that investors in the default funds are yet to make an active decision, but they are likely to do so in the near future. Keeping their funds temporarily in cash, protects the capital for their use when they come to make a proper decision. But even then I would argue, that it may be a couple of decades before the majority of people end up making that decision, and when they do, they are probably going to select a conservative fund because they are unaware of all the issues.

by Black Celebration | 23rd Jan 12, 4:43pm 1327290188

Kimble, I must say I admire your tenacity and I am enjoying this exchange (even if no-one else may be!).

From the top -

A1) Using KS to help buy a first home is a great thing to do for lots of people. It's not investing in the property market, it's buying a home for the first time.

A2) It is a person's own responsibility as to where the KS money is invested. If they decide not to think about it, then the money should be held somewhere nice and safe until they do. Imagine the "KiwiSaver rip-off" headlines that would have happened following the GFC if young people had defaulted to a 80% share allocation from October 2007! I really think it would have strangled KiwiSaver at birth.

A3) The Employer KS contribution is seen as remuneration if the employee has agreed in good faith that this is how it's going to work. For the majority of employees, the only way you can get that extra 2% from the employer is by joining KiwiSaver. If you don't, you miss out. Employers don't tend to give you that 2% in your paypacket if you decide not to join KS (it really is too hard to do that). If you invest 2% of your pay into a unit trust, that's how much goes in. If you invest 2% of your pay into KS, that amount is at least doubled by the employer and the crown contributions. Ergo, the employer money into KS is extra money that would not have been available any other way.

B1) Not true. They won't easily see how much they would have accumulated. Only by having a twin, investing the same amounts in a conservative fund at exactly the same times, will they be able to see the $ difference. It can be worked out, but it will be a mission and no-one will do it for them. What about the returns published in the paper and online? They only ever look at lump sums invested - not regular contributions, buying units. Fees are never satisfactorily handled either.

B2) Really? I would only be happy if the extra return was worth the risk. And I will only know that if I perform calculations like that described in B1 above. I once met a man who had bet his family's life savings on the All Blacks winning all the games in the Lions tour. He hadn't told his wife. Turns out he was right - and well done him. Despite this happy outcome, would his wife think that he did a good thing there? Hell, no! (as he readily admitted). But at least he did it on purpose, assessing the risk and knowing the exact reward. You don't get that luxury with long term investments.

If too much of my extra return was swallowed up in fees, then I would be unhappy that I had taken all the risk but had not been rewarded fairly.

B3) My argument is that the provider has no right to gamble KiwiSaver investors' money on unknown future outcomes without the full knowledge and permission of the investor. The theoretical flaw in Lifesteps that I discussed does not undermine anything else I have said.

by Kimble | 23rd Jan 12, 5:52pm 1327294361

A1) Buying a home at any time is making an investment. Your first home isnt necessarily the same one you will retire to, and many people consider "down-sizing" the residence as part of their retirement plan. I expect it would be fairly common that people would sell their house to fund their retirement.

A2) I agree it is a persons own responsibility where their KiwiSavings are invested. Ideally everyone would make an active decision (taking into account all relevant information, and not succumbing to undue fear), but that isnt the world we live in. The question we have to ask is, which option would end up being worse; someone foregoing retirement income, or someone being upset that their account encountered variance while they werent looking?

A3) You are right, employers cannot be assumed to give non-KS investing employees an extra 2%. But that wasnt my point. My point was that we can expect (overall, and on average) that non-KS remuneration in the future would be lower than it normally would be due to the extra KS costs. The type of remuneration has changed, not the total. Consider a requirement by government that every employee must be given a new car every 5 years from their employer. What would that do to wages? Would the employer just wear the extra amount, or would they change salaries?

B1) I wouldnt be too sure of no-one doing it for them. The variation in the cash rate is low enough that approximations of cashflows would be sufficient to get a good estimate of total "alternative" returns.

B2) You should complain about fees, it is your right as a consumer. What I am saying is that between the two options, cash fund and glide fund, if the glide fund ends up earning more even after fees, you would prefer that over the cash fund. Imagine a situation where a gnome walks up to you and says, "hey that money you lost down the back of the couch, I used it to invest in socks. Made a $100 profit too. Here is your initial amount, plus the $5 cash rate, plus another $1 for your troubles." You might think it unfair that he took so much, but would you then wish sock trading gnomes never existed?

B3) Even the default funds have risk. So what you are objecting to is the degree of the gamble, not the gambling itself. Again, which outcome is worse? Somebody being left with too little money at retirement, or that their sense of propriety is tweaked? Again, it would be nice if everyone did make a decision, but assuming they dont which option would cause more harm? AMP thinks that it could be $72k per person bad.

by Black Celebration | 23rd Jan 12, 10:13pm 1327310003

That's the thing, you see. ANZ (not AMP, BTW) reckon/think/estimate that the person would be $72K worse off. But they don't *know*, do they? What if they're wrong? In the mid 1980s in swingin' London, the Great and the Good (including the regulators) thought that 13% p.a. return for a shares fund over the next 30 years was a perfectly reasonable assumption to make.

Yes, I am making a case for the retention of the present conservative default portfolio, not cash. Why? Because they have proved to be relatively safe funds, the fees are low and there is a smigin of diversity in there - showing the value that can be added by spreading risk across asset sectors. The degree of the gamble is important, yes - especially when it is someone else's money and they are trusting you not to blow it.

I love the idea of sock-trading gnomes, but your scenario reminds me more of the shady character who says "don't ask too many questions love, buy yourself something nice", while stuffing a wad of cash down my bra.

by Black Celebration | 22nd Jan 12, 2:25pm 1327195510

double post

by Kimble | 24th Jan 12, 12:26pm 1327361161

Oops, my mistake on the ANZ/AMP mix up.

Sure they dont "know", nobody does. Then again, you dont know that the cash return will be positive either. It is a safer bet, but we are just talking about differing levels of certainty. You ask, what if they are wrong? I would say that they are almost certainly wrong. The chances of the difference being $72k is near infinitely small.

Their estimate is the difference in the median expected ending values. The difference could be much much greater, or it might be smaller. The thing is, the life cycle model has a $72k buffer.The expected median for the cash fund is $248k, while the median for life-cycle is $320k. I wonder what the variance is around those figures. IN any case, it would be smaller for the cash fund.

The average allocation over time of the life-cycle fund may end up just a little more aggressive than the default funds anyway. In any case, the risk being taken would be greatest at the point in time when the investor is safest being exposed to it.

by Ms de Meanour | 24th Jan 12, 4:08pm 1327374530

The detail I thought particularly interesting was that the minimum returns from a conservative and a life stages fund were expected to be about the same. Can it really be the case that a life stages approach cannot deliver a worse outcome than a conservative one?

by Kimble | 24th Jan 12, 4:54pm 1327377277

I reckon you would find that the "minimum" return was not the absolute minimum. Theoretically, all minimum returns are -100%. That is, there is always a non-zero chance of losing the lot in any investment, its just that that non-zero chance is smaller for some investments than others.

The minimum could have been the bottom of a range that contained 95 or 99 percent of expected outcomes.

What you see in the relative minimums probably has to do with the magic of long-term investment forcasts. Over a longer and longer period, the range of probable returns gets smaller and smaller. Extend the time period to infinity and the range around the expected returns becomes infinitely small. It will always be the case that at some time period between one second and infinity, the lower end of the expected return range of a more aggressive (higher earning) investment will overtake that of a conservative one.

Of course, it matters how wide the range was to begin with. 99% is a lot wider than 50% :)

by Black Celebration | 24th Jan 12, 4:42pm 1327376562

Yes, exactly. We are talking about different levels of certainty. Nothing wrong with that. When you have got someone else's money to invest, and they haven't given you any guidance on what they want you to do with it, then I think there is a responsibility to do your very best not to blow it. It's not a green light to take a bit of a punt and charge higher fees.

Having it just in cash is a little bit too cautious. But the asset spread of a default conservative fund is about right, I think.

If the investor eventually grumbles about the fact that they could have, in hindsight, achieved a better return by switching, then pull up a chair and sit alongside every investor that has ever lived. They could have done something, but they didn't.

by Kimble | 24th Jan 12, 4:58pm 1327377539

1) The level of certainty relates to the time period. Roughly speaking, over a longer time period, the greater the certainty of an investment return. The conservative fund is good at the moment because you could be having someone with a short time frame investing in them. The issue ANZ raises is that many of those invested actually have a very very long time frame.

2) Other investors who have regreted their missed opportunities wont demand that other tax payers compensate them.

by Black Celebration | 24th Jan 12, 5:21pm 1327378908

1) I don't buy that argument, for reasons I have explained at some length above.

2) They can demand all they like, but taxpayers won't compensate them.

by Kimble | 24th Jan 12, 5:47pm 1327380422

1) Can you repeat the specific reasons why time horizon isnt a factor?

2) They are taxpayers.

by Black Celebration | 24th Jan 12, 7:45pm 1327387537

1) Comparing the historical growth of "property", "shares", "fixed interest" and "cash" indexes will definitely deliver the results you describe. Absolutely right. But there's far more to it than that. Before we all stampede towards equities, consider what the additional cost is to the investor is for doing that. Can we say for sure that the risk is worth the reward?

2) So what?

by Kimble | 24th Jan 12, 9:30pm 1327393813

2) Taxpayers who vote. To whom politicians will pander.

1) The results I describe? I was talking about the range of expected outcomes, not some final result. That range is moved up or down by difference in the fee level, but the reduction in variance over longer periods is independent of fees.

Obviously additional fees of 25% would make any product change idiotic, while equal fees would make fees a non-issue in the switch. So the level of fees matters as to whether the it is a relevant issue on the new product. But I havent seen anywhere above any mention of the actual fee difference, which is why I reckoned it wasnt your objection. Are you just assuming that the fees will be unacceptable?

In any case, ANZ was talking about final account balance, so their results would appear to be net of fees (and tax). But that is beside the point. The risk of equities to someone investing over 40 years is less than the risk for someone investing for just 1 month.

by Black Celebration | 24th Jan 12, 7:46pm 1327387565

by Black Celebration | 24th Jan 12, 10:29pm 1327397344

I thought I had been clear that my objection was based on the increased risk and higher fees charged to people, without their permission.

This release has come from a provider who will stand to benefit financially from such a change. At least allow your eyebrow to raise just a little bit?

by Kimble | 24th Jan 12, 10:46pm 1327398398

Of course ANZ will charge more for the life cycle product, it is a higher value product. I am not going to assume that because someone gets paid for something, that the benefits of that service dont exist. If they are wrong, point out their error.

I dont think you have really addressed the increased risk issue. The longer time horizon reduces the risk.

by Black Celebration | 25th Jan 12, 7:53am 1327431236

Based on...the historical performance of the asset sectors. Absolutely no-one knows what the future holds and we are retiring in the future. Academic certainty isn't Certainty.

This is similar to the bloke in the casino that gives expert advice to the baffled newbie on the routlette table. As the punter loses everything, the expert says "Oh, now that's really weird...that has never happened before " And then walks away.

Remember, they haven't told us what they want - so we have to assume that the KiwiSaver member is relying on this money for retirement. We need to treat it with care and keep it safe.

by Kimble | 25th Jan 12, 11:35am 1327444506

No one knows what the future holds, which is why they look at ranges of future outcomes rather than just the medians. You are treating ANY risk as TOO MUCH risk for anyone without much consideration for the range of possible returns.

by Black Celebration | 25th Jan 12, 7:49pm 1327474168

What I said was... "Having it just in cash is a little bit too cautious. But the asset spread of a default conservative fund is about right, I think."

Happy for you have the last word, go for it.

by Kimble | 26th Jan 12, 11:34am 1327530891

Dont give up, we are finally refining the opposing view points down to their fundamental components!

If you think the asset spread of the default funds is about right, what are your specific reasons? Why is 20% risky assets better than 40%? And why doesnt investment time frame matter in that difference?

by Black Celebration | 26th Jan 12, 1:32pm 1327537978

Oh, go on then.

You seem to have corralled the exchange to make it look like a debate about investment theory (which gives the issue far more credence than it deserves).

Testing an investor's attitude to risk and what they want to do may well result in offering the kind of investment mix that you describe. Quite right. No arguments there.

In this case, we don't know who they are, what their health is like, whether they want to buy a first home, whether they are planning to stay in NZ for the long term, if they have dependants, if they have a job, if they have a mortgage, if they have insurance, if they have massive debt, if they are already millionaires, whether they are likely to even make it to age 65 - or are they se to inherit a fortune. Once you know all those things (and many more) you can recommend a long-term financial retirement plan and, if appropriate, suggest growth funds as a suitable long term berth for this money.

Conversely, it shouldn't just be put under a mattress. I suggest the conservative mix because those are low cost and have weathered the GFC storm pretty well - which is KiwiSaver's first exposure to volatility. Opportunities are there to make the most of volatility over the long-term, sure, but that should be done with the knowledge and permission of the investor. The money belongs to them.

by Kimble | 26th Jan 12, 4:39pm 1327549197

Ignoring the 'home purchase' issue, all those other things would be relevant for whether someone should be in KiwiSaver at all. None of them are relevant to someone already in KiwiSaver. You cant take your money out until retirement (unless you need it due to extreme hardship, which is going to be rare).

Over 40 years, almost all KiwiSaver funds will have weathered the GFC storm. None went broke, and the earning potential of those that suffered the most is generally higher than those who suffered the least.

Why is it that we must get permission from the investor to invest in some assets, but not others? The fact that the money is theirs doesnt have any relevance to this discussion. The question is, what should we do given that the money is theirs and they havent told us what to do with it?

by Ms de Meanour | 26th Jan 12, 1:58pm 1327539538

Chaps, you may or may not be gratified to know that you retain at least one loyal follower who is finding the conversation much more edifying and informative than is the normal standard round here. But I would like to lob in the thought that this is not about the investment strategy that is most likely to suit most people - it is about the extent and nature of the Government's duty towards those who can't help themselves.

This is limited, partly of course by public cost and resources, but also because of the risk of the unintended side effect - encouraging apathy amongst those who won't help themselves.

The better the default option, the less the downside of non-engagement and of bad decision-making; and the less the incentive for people to put thought into their long term financial decision making for themselves. Is that good or bad?

by Kimble | 26th Jan 12, 5:05pm 1327550738

We have made a decision as a society, to look after those that cant do so for themselves. People who end up in retirement with no savings will be looked after as long as we dont reverse that decision.

Given that, we are in a situation of having to deal with those future costs of government. KiwiSaver is a way to reduce that future public liability, paid for through taxation, and replace at least part of it with peoples own savings. In this respect, it doesnt help us much to reduce the amount of peoples savings, as we will end up having to make up the difference anyway.

I dont think it is the role of government to reduce the expected value of a persons savings, simply to teach them a lesson. Especially when we know they arent even attending the class.

by Black Celebration | 26th Jan 12, 10:13pm 1327569181

Thanks MdeM.

The reason why I talk about health is that KiwiSaver acts as a possible death benefit too, which is something often overlooked. If the member's dad and grandad died in their 50s - making it all the way to 65 may be touch-and-go ( 20% of maori and pacific island men are not expected to reach age 65 according to Statistics NZ mortality tables).

Kimble, your final paragraph is worded very well indeed. And yet I do remain of the view that the KiwiSaver money that comes from the enigmatic default source is ours to look after and keep in the garage under a tarp. By all means, give it a runaround every now and then to keep things ticking over, but preserve it's value - because you never know when the owner will want to use it.