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