KiwiSaver providers mixed on whether KiwiSaver should be used to encourage 'rainy day' savings on top of retirement and first home savings

KiwiSaver providers aren’t jumping at the Commission for Financial Capability’s (CFFC) idea of enabling people in KiwiSaver to put some money in a “rainy day fund” before saving for retirement, and in some cases a first home.

The CFFC’s education manager, David Boyle, is proposing KiwiSaver providers set up cash-type “rainy day” funds their members could put a capped amount of their contributions in, before contributing to their regular KiwiSaver fund.

Members would be able to withdraw money from their “rainy day” fund whenever they deem necessary, rather than having to meet the hardship criteria to make withdrawals from their regular KiwiSaver fund.

Boyle’s logic is that deducting both short-term and long-term savings from KiwiSaver members’ incomes would prevent them taking out expensive loans or all their KiwiSaver savings, should they become strapped for cash.

See this story for a more thorough explanation of Boyle’s idea. Note the CFFC is a taxpayer funded organisation that operates independently from the government.

Three of the five KiwiSaver providers interest.co.nz spoke to - ANZ, Westpac and Nikko Asset Management - believe KiwiSaver isn’t the vehicle that should be used to address broader issues around financial capability, debt and loan sharks.

They say they already offer products that encourage people to save and manage their money well.

Simplicity on the other hand is keen to follow Boyle’s lead to progress the idea, while the NZX’s SuperLife says it already has a similar offering.

That’s what savings accounts and budgeting tools are for

Nikko Asset Management’s New Zealand managing director, George Carter, believes KiwiSaver is “becoming a bit of a Frankenstein”.

“It’s a first home withdrawal, it’s a hardship loan, it’s a slush fund for a rainy day. The whole point of this was to encourage people to start very small, saving for some top-up retirement benefits. It’s only 3% as it is.

“Have we really forgotten what this was set up to do?”

Westpac’s head of wealth products, Nigel Jackson, agrees that KiwiSaver isn’t designed to be a savings account.

He accepts that having established relationships with their members, KiwiSaver providers are well placed to help people manage their money more broadly.  

Yet he says the argument for this case is stronger in the banking context than it is in the KiwiSaver one - especially when there are more suitable savings products available.

Similarly, an ANZ spokesperson says: “At face value, it would seem to us there are other banking products that might serve the same purpose without making KiwiSaver more complex and potentially eroding the retirement nest-egg of account holders.”

Does a separate fund need to be used?

Carter says if access to emergency funds was something the Government wanted to incorporate into KiwiSaver, an easier way of doing so would be to allow members to withdraw a certain amount from their regular KiwiSaver fund, within a certain time. IE $5,000 over five years.

This would also mean that members wouldn’t have money stored in a cash fund, when they could earn greater returns keeping this money in a more suitable KiwiSaver fund.

On this point, Boyle argues that for a rainy day fund to be useful, it would have to be cash-type fund that isn’t at risk of devaluing.

Simplicity founder, Sam Stubbs, says the devil in Boyle's idea will be in the detail, "but my first thinking on this is that you wouldn’t need a separate account.”

Like Carter, he says some limits would need to be implemented around how much members could withdraw.

Providers can afford extra admin costs 

Yet Stubbs believes the pros of making KiwiSaver “relevant to your daily life” outweigh the cons of some people treating it like a cheque account.

“If you need the first $5,000 and you’re living on that anyway, you’re unlikely to be the sort of person who’s saving a lot on KiwiSaver anyway.”

Stubbs admits that enabling members to make withdrawals from their KiwiSaver or “rainy day” fund would require extra admin for providers.

Yet: “Any provider that would be using cost as an excuse, is using it as an excuse, not a reality. This is not particularly difficult to do.”

Stubbs says Simplicity would be an “early and enthusiastic supporter” of Boyle’s idea, “but I think this is very much their [the CFFC’s] initiative, so they should lead and we will support”.

SuperLife’s 'side car' solution

The NZX’s head of funds management, Hugh Stevens, points out SuperLife already has an offering similar to Boyle’s “rainy day” fund.

SuperLife KiwiSaver members can contribute to a “side car” fund in addition to their regular KiwiSaver fund, which they can make withdrawals from whenever they want.

The value-add is that SuperLife can in most cases collect contributions for the “side car” fund directly from the KiwiSaver member’s employer, like it does with other workplace super schemes.

While members can also make contributions via direct debit, having the option of not actually seeing the money pass through their bank account arguably makes saving easier.

Any contributions SuperLife KiwiSaver members make to their “side car” fund have to be over and above the legal 3% minimum contribution they make to their KiwiSaver fund.

What Boyle is proposing is that a member’s entire 3% contribution fills up their “rainy day” bucket, before flowing in to their larger retirement savings bucket.

An Inland Revenue representative says that at face value, Boyle’s idea would require a law change.

Stevens points out that if a SuperLife member wanted to fill their “side car” to a certain level before saving for their retirement, they could just go on a KiwiSaver contributions holiday until their “side car” fund was at a level they were happy with.  

The other key difference is that SuperLife members have a range of 40 different funds, with different asset allocations and risk profiles, to select from as their “side car”. Meanwhile what Boyle is advocating for is that the “rainy day” fund be a cash-type fund that isn’t at risk of devaluing.

Since introducing the “side car” option at the end of 2016, 10% of SuperLife’s KiwiSaver members have taken it up.

Given those at risk of spiralling into debt by not having savings or a “side car” might not be aware of SuperLife’s offering, Stevens invites Boyle to look into it.

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28 Comments

I like the idea of an easy way for people to save up an emergency fund, but does this have to be part of Kiwisaver? Why can't we have a piggy back scheme (i.e. uses all the systems like IRD) but called something different so that is clear what these funds are for.

I say this because I find people are confused enough about what Kiwisaver is, how it works and what it is for. My concern is that people tick the default 3% and think they now have emergencies and retirement covered when in fact they have barely started,

I am concerned that somebody supposed to be about 'Commission For Financial Capability' (CFFC) came up with this daft suggestion. The idea actually discourages financial capability.

Sounds like a great idea. Ideally we'd want to lower the KiwiSaver access age to 18, make kiwisaver manditory and have 100% of employees' incomes going into Kiwisaver. In addition issue each member with a green coloured membership card they can use at thousands of green emergency money dispensing machines across the the country. Maybe even give it a new name like... Kiwi-Bank.

Haha. Yes it feels like Kiwisaver is becoming seen as a tool to solve all the general publics financial problems.

Keep Kiwisaver separate, simple and universal. No fiddling with it- please.

I am strongly supportive of the idea.
I am over 65 so can access my KiiwSaver funds as and when I wish which usually takes about 5 days from notice for funds to be deposited in my bank account.
I am therefore using my KiwiSaver fund as a vehicle for investing my emergency funds, and as a means for providing some cheap exposure to the share market which have been producing far better returns compared to term or bank deposits
. .
The reality is that for most kiwis, savings for rainy days means at best putting it away in term deposits.
Term deposits are not really flash for this purpose; not only returns currently low (and I suggest in the long term they don't perform as well as exposure to equities) and there are strict conditions which mean that in an emergency breaking a term is expensive and there is considerable time delay. For this reason many kiwi savers hold monies in a call account for which returns are negligible.
If a rainy day component was included in Kiwisaver, rather than an annual dollar limit withdrawal as suggested, an annual frequency withdrawal would make more sense.
Such a fund would enable the average Kiwi to have exposure to funds investing in equities which most Kiiws do not do other than through their KiwiSaver fund.

As I noted; as I am over 65 and the ability to withdraw funds at will, I already have this advantage. I suspect the reason for providers - and especially banks - to be indifferent is that it is while it is advantageous to their customers, it is not advantageous to them.

I'm guessing you don't have a background in financial planning?

You realised that having emergency funds exposed to equities volatility is considered a terrible idea? E.g. Feb, Mar, this year equities took a dive and if you were in a situation where you had to withdraw your funds at that time you might have to take loss, which sucks, as well as dealing with what ever problem made you dip into your emergency funds in the first place.

And that was a mild blip, if it had been a proper crash you might have to sell assets at a massive loss while dealing with whatever you personal problems. So in that scenario you have a personal emergency, the stress of a large financial loss and less money to deal with it.

I suggest the people who don't mind letting people put themselves into this trap are the ones that stand the most to gain in the short term e.g. simplicity who is currently a very small player wants to be seen as the good guy to attract more money to there funds.

Agreed

Grendel
I strongly disagree as you have made an incorrect assumptions especially a lack of financial planning.
I have funds split with some "laddered" term deposits as well as a rental. I also have a pretty rock solid superannuation scheme (Government Superannuation Fund - ex state servant - which is as rock solid as you can get). So I think you could be wrong about my financial planning experience.
I am well aware of the volatility of the equities market such as the 1987 share market crash. Two points; rainy days should not be an annual event so investment of funds is at least for the medium term, and savers should be looking at their risk tolerance and there are are a variety of funds to meet their level of tolerance.
Also note that an advantage of KiwiSaver, unlike many financial institution products, ones funds can be readily transferred not only between providers but also the type of fund at no cost (entry/exit fees or indexes).
The problem that many kiwis have is that their "rainy day" fund is probably fairly small - probably only a few thousand dollars. Their opportunities for investment other than term deposits is limited; the mooted proposal would able them to invest at least some of this in a fund that suits their risk tolerance.

Hi Grendel
I really question the depth of understanding behind your criticism,

Your criticism are a concerned about short term volatility and reflect the fears of a low risk investor.

Its not rocket science. If that is the case, you do'nt expose all your KiwiSaver funds (including rainy day contingency) to growth/high risk. The solution is simple. Split your KiiwSaver fund between growth and a more balanced fund as most providers allow. If you are looking long term, put the majority of your funds in a growth fund, and a lesser amount (but sufficient to cover that rainy day) in a more balanced fund that is likely to be less volatile and one which is likely to return more than a term deposit but also you could more readily draw on if need be at short notice.

KiwiSaver provides banks and other KiiwSaver providers with good returns. However, they are not the most desirable forms of investments for them as they are more transparent, have more reporting requirements, their funds' performance are readily comparable (e.g. Morningstar/interest.co.nz) and usually have far lower management and entry and exit fees compared to their other similar products.

I do not have a vested interest as you suggest in your comments in trying to trap people, but I am seriously wondering if your simplistic criticism is such that you work for a financial institution.

When I said I assumed you didn’t have a ‘background in financial planning’ that meant planning for others not yourself. Had I said ‘personal finance’ your defence might have been valid.

As for your criticism the entire article is about allowing people access to emergency funds not boosts people superannuation savings. This means that the funds held for this purpose should be available at short notice, so anything with and investment horizon of more than a few months (even a few days) would be inappropriate and basically only leaves you with low risk options.

You stated in your original post that the rainy day component would be exposed to equities which as I just explained would be totally appropriate. You later corrected yourself saying that you could split this into less risky fund/asset classes, so well done you got there in the end. But that is a completely different stance forms your original post.

As for my suggesting you had vested interest, apologies I should have been clearer, I was referring the vested interest in the article not yourself specifically. As for my vested interests, you are in the ball park with Financial Institutions. Specifically I am an Accountant, so spend far too much of my time digging people out of holes they dug themselves in by following bad advice. So vested, yes but not in the way you implied.

As for implying I am a low risk investor, an actual financial planner wouldn’t think so. But this isn’t about me and my risk tolerances, it’s about the appropriate way to save and store and emergency funds and I am able to take my basis out of this and you would too if you have a background in financial planning.

One thing that hasn't been discussed which I would like to see debated: Capping the age at which you can use your kiwisaver money for a first home deposit. Is it wise to allow a say 45yo to drain his/her kiwisaver to buy a house, which is subject to both market forces and also exposed to other events that could see things go sideways. eg, gets paired up in late thirties, settles down and buys home with partner, pops out a few kids , then a few years later things go sideways, they split and the house gets sold, leaving (usually) the woman with the kids and limited income for another 10 years. I can see the capital from the home being frittered away on raising the kids while probably renting, and at the end of this (s)he's late forties/early fifties and not having much time to rebuild retirement funds.

Thoughts?

Why? They still have to live somewhere in retirement and it is far cheaper if government does not need to pay for private accommodation or even housing them via state homes that don't exist. (The govt does not even have housing for the disabled under 65 in society who need it with many literally living rough or in private retirement homes & hospitals). There are no accessible rentals and housing mod a private rental has been an epic disaster when tenants have to move & pay for modifications. Better have them in their own home/apartment (great savings for the taxpayer), and with luck they will still have a place to live or enough capital for another deposit as things mostly do not go all tits-up. Home ownership & housing is the major issue for retirement, also the major cost. Everything else can be reduced & variable. Very rarely do you need to spend all your retirement in a hospital ward so you or the taxpayers will be putting money away for housing anyway. It is cheaper doing it earlier & in non rental conditions over time. (Especially with the housing mod needs).

I got an email from my kiwisaver fund provider that they weren't investing in weapons, pornography, or nuclear power!

I was not impressed. The sole purpose of kiwisaver IMHO is to replicate money and wealth for retirement. Therefore, the only thing that matters is net ROI. My provider softened the blow by saying that sin stocks hadn't done well but I don't think that 's true. All of the defense ETF's have gone gangbusters over the last few years.

I kind of resent having someone else’s moral standards imposed upon me at my expense. Perhaps kiwisaver fund providers could provide ethical investment as an option rather than a mandatory policy.

I always thought there was a case for an unethical fund. Those unethical investments could be cheaper than the rest because some people won't touch them.

And are defence companies really unethical? Would they be put in the unethical basket during WW2, Cold war, during some other expansionism? They are our defense.

Wasn't war bonds the reason America decided to run in on one of the world war clusterfks.Sure they could shoe in a heroism story but really it was on the money. [But yes investing in a mine company is unethical, rarely do they get installed in civilian absent locations. Likewise with many others.] What about the porn? When did porn become unethical? Far more creatively minded and less violent than many game & movie developers. They might as well ban investment & productions in Game of Thrones (for the unrealistic expectations on male physique).

Stop moaning fat pat and change providers.

I do like a good moan. I had already just changed providers because of an article I read here on interest regarding fund fees.

So you changed to a provider (Simplicity) that advertises itself as an ethical, non-profit investor (it already was avoiding nuclear, clusterbomb, mines and tobacco) and then you moan when they keep on down that same path? *golf clap*

Go back to the banks and let them charge you 4 times as much for the privilege.
Or switch to Amanhah, and avoid pork and banks too, and pay 2%, but at least you'll be sharia compliant.

Yes I was attracted by the low fees. I see the purpose of kiwisaver in black and white. Wealth building for retirement with a focus on returns. Everything else is just mission creep. I wasn't expecting a care bear tree hugging fest. I'll give them the benefit of the doubt though, for a while.

So you didn't do your research, not my problem. Go take your money to another of the 40 odd kiwisaver providers.

I do my research. When I see the word ethical relating to investments I read "ostensibly ethical for publicity reasons", I didn't think anyone would actually dump defense stocks. Whatever I've obviously touched a raw nerve.

Typical right winger cynical perspective, no morals, but might fake it for a few extra bucks.

I care a great deal about NZers and I would like to make society a better place. I would classify myself as anti-neoliberal slightly right wing, however I very much admire and respect people like John Campbell, Jane Kelsey, Bryan Bruce, Nicky Hager .. so perhaps I don't fit your stereotype. Perhaps I'm not even right wing, perhaps I'm left wing? I don't know.

This may sound a little "Jonathan Swift" but here goes. Every action has positive and negative consequences for different groups in society. Imagine dividing society into the following groups (see below). To quantify the merit of an action you must make a weighted adjustment to that action's consequences according to the relative importance you place on the group under consideration. This is personal to everyone but perhaps the weightings for me would be 0.7, 0.18, .119, 0.001

1. myself and my family
2. my circle of friends (perhaps community)
3. my fellow New Zealanders.
4. my fellow man

How does investing in Ratheon or Lockheed Martin stack up? The majority of benefits flow to groups 1,2, and 3, while the detriments accrue tp group 4 who reside in the middle east. Ratheon and Lockheed Martin also drive technology innovations which may benefit group 4 in the long run. Similar analysis for all the sin stocks. Look at it like that and it's an easy decision!

@ fatpat. I'm happy for you to invest how you choose. Just as I am happy for there to be variety in the Kiwisaver funds for folk to choose from.

Nooooo! Kiwisaver is there for retirement and shouldn't be used for a 'rainy day' or 'emergency fund'. There are many other options out there if people are wanting an easy way to save. Perhaps offering a entire new type of fund or even scheme to get people saving for a rainy day or emergency fund. Kiwisaver is not a savings account.

What is the point of this discussion?
If people wanna start a kiwisaver style rainy day fund, then go join Superlife or InvestNow.

The problem with many people I know is they don't manage their finances. Some of them seem to have financial rainy days as often as there are literal rainy days.