By Amanda Morrall
KiwiSaver accounts have topped the NZ$7 billion mark with almost an eight-fold increase in two years.
Two years ago, KiwiSaver funds under management were just shy of NZ$1 billion. In December 2010, the total sum of accounts had grown to $NZ7.38 billion, a "phenomenal growth rate'' for the funds management industry, said MorningStar's co-head of research Christopher Douglas. (For more recent KiwiSaver statistics see MorningStar's latest quarterly report.)
Douglas said a number of factors contributed to the dramatic surge, some predictable and others a matter of market timing. Among them, a greater than expected uptake of KiwiSaver on top of Government and employer contributions.
The regular savings model of KiwiSaver also boosted investment returns, he added.
"That's one of the interesting things with KiwiSaver. Because they're contributing on a regular basis, they're incrementally adding to their KiwiSaver fund.''
Looking back at international markets conditions in 2008, that method of savings (as opposed to lump sum deposits) proved profitable. This phenomenon is often referred to as dollar cost averaging.
"By and large, you've had volatile market conditions that have fluked the incremental contributions that come along with KiwiSaver. It's a great discipline because no matter what the markets are doing investors are always contributing to the KiwiSaver account,'' he said.
Outspoken KiwiSaver critic Bruce Sheppard said the explosive growth in funds was the expected result of Government contributions. He hailed the increase as anything but a national saving story success.
"My problem with KiwiSaver is unchanged from when it was first birthed. It is in essence a massive subsidy of the fund management industry,'' said Sheppard.
Despite the optimistic view that KiwiSaver would transform savings habits and buoy the national economy, Sheppard argued it was having "the perverse effect of reducing the liquidity of the stock market'' and compromising national sovereignty.
His rationale was that passive funds (which made up a large portion of KiwiSaver market) soak up the available free float of liquidity in the stock market, and push up risk premiums on equities. The ripple of effect of that, he further argued, was declining price-earnings ratios which made good Kiwi companies attractive to foreign buyers.
"It’s not good for the national economy because it’s sucking out direct productive investment and recycling it back into direct productive investment through a fund manager who clips their ticket. Once that has happens the liquidity in the market is removed and given these fringe KiwiSAver funds only invest in listed companies, the declining liquidity in the stock market is actually a risk to our national sovereignty.''
Although the eight-fold increase could be seen as a fresh inflow of investors preparing themselves for retirement, Leslie said the closer look at the retail funds sector indicated that KiwiSaver had grown at the expense other retail managed investments on the market.
As a percentage of net assets in the retail sphere KiwiSaver was up 325% but total net assets for retail managed investments had only grown from NZ$20.645 billion to NZ$24.07 billion over the same period, an increase of just NZ$3.426 billion or 17%.
"So KiwiSaver has cannibalised savings from other savings and investment product,'' Leslie said.
KiwiSaver cannibalising other retail managed funds
Leslie said only one product type had recorded positive growth in net assets over the same period of time. Those were PIE Investment Trusts, which grew from NZ$10.997 billion to NZ$11.795 billion.
While there are more than 30 providers competing for KiwiSaver dollars, two of them hold almost half the assets between them. ANZ's OnePath and ASB have a 45% share of the funds under management.
Despite the more than 1.6 million New Zealanders enrolled in KiwiSaver, 50% of the workforce has yet to join, representing a further opportunity for the fund management sector and KiwiSavers depending on one's view.
While pre-existing managed funds may have suffered since KiwiSaver was introduced, household bank deposits soared with panic-stricken mums and dads furiously channeling money into government guaranteed institutions following the financial crisis that hit in earnest in 2008.
From December 2007 to September 2010, household deposits grew from NZ$76.048 billion to just over NZ$91 billion, according to Reserve Bank records.
KiwiSaver brings new crowd of investor
While financial behaviour has been anything but normal since 2007, Douglas believed KiwiSaver was capturing new money, and fresh investors.
"Sure there are certain parts of the market that we've seen money flowing away from but by and large the KiwiSaver money is new money, new investment, and from people who might never have invested before.''
A break-down of assets by fund type supports his view. Close to 36% of the NZ$7.379 billion in KiwiSaver accounts is investing in defaults funds, which are the type of fund you're put into if you do not declare a choice.
Default funds are widely regarding as the fund for investors who don't know any better. Ironically, default funds proved the best performers over the past three years because they were heavily weighted in cash and bonds, the safest asset classes when markets world-wide nose-dived.
With the pick-up in the markets and signs of economic recovery, more recent evidence suggests growth oriented funds are poised to shine. Some of the worst performing funds of 2008 were found to be the among the best in 2010.
(Updates with comments from Bruce Sheppard)
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8 Comments
So the true increase is less than $4b, probably far less by the time cannibalised other investments are fully included. Of that a fairly large proportion has come straight out of peoples taxes as a government subsidy. Then as mentioned in the article this is a period where there have been stunning returns if you were in equities (bear trap?).
And a study out the other day was viewed as being good a large proportion of NZ said Kiwisaver would be their only source of retirement income. This is probably the most dangerous aspect of the whole scheme, people are being led to believe 2% of their salary for 30 years will be enough for them to be rich rather than the reality it would be a below subsistence income.
Sorry how was this a good idea again?
Bullitt, in pointing out that 2% is too low to fund a half-decent retirement (which is of course true) are you suggesting that everybody should instead be required to contribute 15% of their salary into KiwiSaver?
If not, what? Bearing in mind that it is simply not realistic to expect every New Zealander to become as engaged and competent at personal financial management as you and most of the goodfolk on this board are?
No I'm saying the government contributions to all kiwisaver accounts should be refunded to them. Any remaining money should be refunded to the people who hold the accounts if that is more or less than they originally put in then so be it.
At the least the Government and everyone advocating for Kiwisaver should be honest that Kiwsaver is not going to be sufficient almost everyone.
Putting more money into it just magnifies the existing problems.
People have the option of putting in more than 2%. Any way its a new scheme so why not increase this as time goes by eg 1% increase each year till you get to 8%or 10% as an example. As for the study saying this is peoples only retirement fund beats having no retirement savings at all and then living of government handouts at 65.
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