2020 has been at best a turbulent year for people and businesses in New Zealand as it has been around the world. This has affected every aspect of our lives, including our investments. For many New Zealanders, the largest and most important of these is their KiwiSaver accounts. The FMA’s annual KiwiSaver report shows, however, that despite significant slowdowns, KiwiSaver has continued to grow, both in terms of its total funds under management and total assets. The scheme continues to deliver on its core objective to help New Zealanders prepare for retirement.

Even though returns declined strongly earlier this year, overall confidence in KiwiSaver remains strong. This is due in part to the changes made to the default KiwiSaver scheme in March, immediately preceding the pandemic, which impacts how future default providers will have to invest funds, and how they interact with members to help them prepare for retirement. These new requirements will impact the appointment of the new default KiwiSaver providers by the Ministry of Business, Innovation and Employment (MBIE), who released the long-awaited Request for Proposals (RFP) on October 2.

KiwiSaver has faced its biggest test to date

With the arrival of the COVID-19 Pandemic, markets tumbled and many KiwiSaver funds dipped sharply. Since then, KiwiSaver investment returns have dropped a total of 122% from $3.8 billion to $820 million. This meant that many members saw investment losses for the first time, leaving them unsure of how to react. As a result, during the first lockdown, many spooked investors switched, despite guidance from fund managers and the FMA not to, from growth funds to conservative effectively locking in the losses that they’ve already taken.

Fortunately, this hasn’t interfered with KiwiSaver’s core purpose. This year, the scheme has paid out $1.33 billion to retirees, and $1.19 billion to first time home buyers—a 28% and 25% increase over last year respectively. This, alongside the fact that both total assets and total funds under management have continued to increase, has helped to illustrate KiwiSaver’s sustainability and helped to maintain confidence in its ability to serve its function as a safe and reliable investment vehicle.

Despite negative investment returns, KiwiSaver has continued to grow

Despite suffering negative investment returns, KiwiSaver’s total assets grew by 17%, membership increased by 3%, and total funds under management grew by 8.7%. This growth was possible despite the global market impacts of COVID-19 because of contributions by members and employers.

Changes to the default funding scheme

On March 1, the government initiated a number of changes to the future requirements of default scheme to ensure that default KiwiSaver funds work in the best interest of their members. These are now being used in the tender process to select new default KiwiSaver providers. Key changes emphasised by the MBIE include:

1. Switching default fund settings from ‘conservative’ to a ‘balanced’ fund

This is intended to improve the likelihood of increasing people’s returns in retirement. In response to the year’s market volatility, KiwiSaver members moved $1.5 billion from growth and balanced funds to conservative or cash funds. For many, however, this isn’t likely to have been the best choice. KiwiSaver is designed as a long-term investment scheme. While investing in balanced funds carries more risk than a conservative fund, it also allows for faster recovery and growth. As a result, those who use balanced funds tend to see about 1 per cent greater returns than those in conservative funds. Over the course of an entire working life on an average income, that can translate to over $100,000.

2. Requiring default providers to do more to engage with their members

This requirement is designed to help members make the right decisions for their particular circumstances. As an opt-out scheme, KiwiSaver has a disproportionate number of members who have no investment experience and lack the basic knowledge for making investment decisions. Because of this, it’s particularly important that default providers do as much as they can educate them and take steps to protect their interests.

3. Incentivising default fund providers to charge reasonable fees

The negative investment returns seen by many members this year have drawn particular attention to the fees charged by providers. The FMA commissioned a report from MyFiduciary analysing the value for money members receive. The report found that, while providers were “true to label”—meaning that schemes labelled as “active” or “passive” showed corroborating levels of activity—there was no significant relationship between the level of active management employed by providers and the fees they charge.

This means that less active providers didn’t necessarily charge lower fees than more active ones. The government aims to correct this by making fees a significant part of the overall evaluation during the tender process.

4. Excluding funds that invest in fossil fuel production

The massive wildfires in Australia at the beginning of the year starkly illustrated the impacts that climate change can have on the environment and economy. Excluding funds that invest in fossil fuels is designed to help address the impacts of climate change and to help New Zealand transition to a low-emissions economy.

5. Transferring non-active default members

Current default providers who are not reappointed as one of the default providers will not be able to retain KiwiSaver members of default schemes. To ensure that these members retain the benefits of being in a default fund, they will be transferred to other default providers. Additionally, this serves to provide an incentive for existing default providers to comply with new default provider requirements in order to be reappointed in 2021.

These changes are now being applied to the RFP to select new default providers. This is an important part of improving the overall performance of the scheme, and in building public trust and boosting total investment to better prepare New Zealanders for retirement.

Despite KiwiSaver, New Zealanders often still aren’t prepared for retirement

The vast majority of New Zealanders with full-time employment are already enrolled in KiwiSaver, yet very few are actually prepared for retirement. The CFFC Financial Capability Barometer 2018-19, created and released by the Commission for Financial Capability, shows that 65% of surveyed respondents have thought “little, or hardly at all” about how much money they’re likely to need in retirement. A shockingly low 7% of respondents over the age of 50 had a specific retirement plan in place.

Across all age groups, just 5%t of respondents had a clear retirement plan, and 16% knew how much they needed to save in order to retire at 65. 79% had “no idea” how much they would need in savings in order to fund their retirement. This reveals an alarming lack of preparedness among not just younger Kiwis, but also those nearing retirement. This still holds true in 2020.

Should KiwiSaver be compulsory?

Currently, KiwiSaver is an “opt-out scheme”, meaning that people are automatically enrolled upon taking employment unless they opt-out. In 2020, KiwiSaver membership increased by 3%, reaching 3 million members—slightly more than the projected size of New Zealand’s labour force. Still, just 67% of people over the age of 18 are enrolled in total.

By making KiwiSaver mandatory, it would be significantly easier to boost participation, and ensure that at least all employed New Zealanders had some form of retirement fund in place. It’s unclear exactly how effective this would be, however. Many non-members are close to retirement or retired, not employed, or earn too little to save for retirement.

Projecting retirement income

This year, KiwiSaver member’s statements included a projection of how much money members could expect to receive as a weekly income given their current contributions. The KiwiSaver Statements report shows that of the 34% who recalled seeing their projected lump sum, 63% planned to take some form of action in response. The most common of these was to increase their payments.

This shows that the problem for many New Zealanders is a lack of information regarding precisely what their current contributions will do for them. By exposing them to more specific and personalised data, they can be moved to take action to prepare for the future more actively.

Financial advice would help New Zealanders

Research by the Financial Services Council, and sponsored by Trustees Executors "Money & You", found that New Zealanders who do get advice save more, invest more, travel more and overall have improved wellbeing. On average, financial returns for Kiwis that get professional advice are 4% better than those who don’t, they save 3.7% more, and travel six times more.

The same research also found that New Zealanders who get financial advice on average have KiwiSaver balances over 50% bigger than those who don’t, are more likely to have insurance cover and have greater peace of mind and confidence in making financial decisions. KiwiSaver is one of the most important investment vehicle for many New Zealanders, particularly with regard to preparing for retirement. Many of the changes undertaken this year are designed to make an investment in KiwiSaver more accessible and to incentivise members to contribute more to safeguard their financial futures.  But in the current economic climate, and the impact of COVID-19 on the economy and jobs, these changes need to go hand in hand with the need to seek professional financial advice.

If you would like to discuss your financial situation, please contact a Trustees Executors Private Wealth Adviser today.

Phone: 0800 002 478
Email: [email protected]