By Amanda Morrall
KiwiSaver sceptics delight in minimising the returns that the national savings scheme can reasonably expect to deliver when you factor in fees, tax and inflation.
The performance of Fidelity Life's Option Kiwi Fund won't sit well with the discontented.
Since inception, the cash-based options fund has served up an annual before-tax, after-managment fee return of 11.59% . Default funds by comparison, which on average out performed all other funds, delivered just over 4% over the same time.
To be sure, performance of this kind is the exception not the norm in KiwiSaver and the level of risk that goes with it is not for the faint of heart. (Those super charged returns were made selling options on US 10-year government bonds.) As an aggressive fund, it's at the top of the scale for volatility and you'd be mad piling all your retirements eggs in this basket. (For a loose guide on risk tolerance visit sorted.org.nz) .
Regardless, it does go to show that despite claims to the opposite, KiwiSaver as a retirement savings tool, is not ineffectual.
As evidence of that, almost 80% of Fidelity Life's senior managers are invested in their own, points out CEO Milton Jennings.
"It was a pleasing result for us. We found out through that period that this investment strategy worked very well. We almost had the returns of an equity fund with the [low] volatility of a fixed-interest fund."
Jennings dismisses the arguments against KiwiSaver (to read more on the argument against see our interview with Bruce Sheppard) and holds it up as a savings vehicle that could ultimately end up saving a nation of unrestrained spenders from itself.
"Looking back our parents were very good savers, we're average and our kids are hopeless - because there hasn't been that savings culture,'' he said.
"That's why I think KiwiSaver is a such fantastic product for a country such as ours which has such high debt levels, probably some of the worst in the world.''
Although some suggest the savings crisis in New Zealand has been blown out of proportion, the issue has become a focal point for National heading into the upcoming election. Savings and investments has already been labelled the theme of the May 19 Budget.
While the savings issue looks set to become a political football, Jennings suggested 30 to 50 year-olds who want to be properly prepared for retirement will do well with KiwiSaver. Despite the heavy burden of financial obligations facing this demographic, he said it made good sense to make retirement savings a priority, even if only 2% of income every month.
"I'm a firm believer that savings is a habit and the earlier you get into a savings habit the better...We have to turn ourselves into a savings culture.''
While other retail managed funds might offer flexibility, Jenning said the advantage of KiwiSaver was that it had comparatively low fees and a lock-down component. (To read more about fees and expenses click here.)
"It protects you from yourself so you don't end up using your money for a holiday or something.''
As for the protections afforded the national savings scheme itself, Jennings, for his part, expressed confidence in its long-term viability.
"You can't compare KiwiSaver to a finance company. Its funds are locked in a trust and protected by independent trustees. It's completely different from a finance company structure where managers have the power to invest wherever they like. KiwiSaver fund managers can't borrow money and start leveraging. It doesn't work that way.''
For most of those satisified with the security of the scheme, the bigger question is what fund to be in and how much exposure to 'growth' assets.
Those closer to the 50 side of the equation would normally expect to be scaling back their level of risk, said Jennings.
"Modern theory has it that in your 30 and 40s you should have a higher risk profile and be putting your investments into growth assets, equity and mortgages and then as you go through your 50s, start reducing your risk profile, going into more of a balanced fund; 50% growth and 50% income.
"Then into your 60s back into a conservative type of investment. So you're protecting that capital that you want to build up all those years. Because if you get a global credit crunch crisis when you're 62 or 63, you don't want to see a drop in your balance.''
Because most of Fidelity Life's KiwiSavers come into the scheme through a financial adviser, those kind of discussions would also take into account a range of other factors, such as personal circumstances, other assets and lifestyle expectations, he noted.
Jennings said he was hopeful new advisory regulations would help to restore public confidence in the sector so that people would seek out good guidance in order to plan more holisitcally for their retirements.
"I think the licensing of finance advisers is a very positive move. It'll raise the professionalism of the whole industry and it'll raise the respect those advisers will have on the market.
The whole industry has taken a hammering with finance companies and there's also been a number of funds that have closed up.''
In general terms, Jennings said it was important to remind people that KiwiSaver was a long-term investment and that they shouldn't be checking their balance sheet every week and switching managers on the basis of every quartlery performance report.
"This year's winner is usually next year's loser. If you are choosing a provider, choose someone with a long-term track record. Make sure that track record is still with that manager and that stick with them."
18 Comments
As an aggressive fund, it's at the top of the scale for volatility and you'd be mad piling all your retirements eggs in this basket
This is one of the things I am disappointed about with kiwisaver, the fact you cannot spread your kiwisaver account across multiple providers. [i am however in favour of kiwisaver as a whole]
There are a few individual schemes I would like some exposure to, but not total exposure. Some providers do offer the ability to 'mix and match' within their own stable, but I would prefer to go across providers. As a minimum it is spreading the risk, many people spread their private investments across multiple providers/advisers.
I dont think it would be too difficult to have, say, one 'live' provider per year, and you can then switch providers but have the option to keep your current balance with the old provider if you want. Does anyone think otherwise? ie is there a good reason for not allowing this?
I contacted the ministry at the time they were asking for initial feedback on the kiwisaver concept and suggested they allow multiple providers, but they said it was not on the cards.
As you say, many people spread their private investments across multiple providersd/advisers. You can already have your KS savings with one provider, and other savings with other providers - the fact that you've got a KS account does not mean you have to put all of your savings in it.
So I'm struggling to see how it would be any different in practice if you could have some KS savings with one provider, and other KS savings with other providers?
Presumably you would not be expecting the Government or your employer to give you more than one lot of subsidy if you were allowed to have more than one KiwiSaver account? Because if that's what you're saying - then this taxpayer says you can whistle for it!
As you say, many people spread their private investments across multiple providersd/advisers. You can already have your KS savings with one provider, and other savings with other providers - the fact that you've got a KS account does not mean you have to put all of your savings in it.
I take your point but think it's only valid if you have the ability to contribute to both KS and have extra funds left over.
If KS is all you can afford then it doesn't apply. Some people, not all but certainly some, will be unable to afford to contribute to KS and some additional exogenous savings. KS will be it for these people.
Presumably you would not be expecting the Government or your employer to give you more than one lot of subsidy if you were allowed to have more than one KiwiSaver account? Because if that's what you're saying - then this taxpayer says you can whistle for it!
You presume correctly, so stop whistling for straw men ;)
Sorry, but I can't whistle! Never have been able to - it's probably something to do with the shape of my teeth and all those years spent in the circus, bending iron bars with them. (:-0
I do accept that many people can't afford more than the $20/week which is all that's needed to maximise the benefits of KiwiSaver (as opposed to other savings accounts which don't attract Government subsidy). But if that's all they're saving, then their total KS holding will not be very large - in which case, it is very unlikely that the additional return to them of spreading their savings across more than one different provider, even if they manage to identify the optimal mix, will justify the additional administrative costs for providers and for the Inland Revenue Department, which are non-trivial and all paid for by taxpayers and/or KiwiSaver members themselves in the end.&
Let's see what Amanda has to say though, in her promised article on open architecture ...
That's a good point re small sum.
From the opposite angle, for someone who has major KS contributions - not withstanding your point about putting other savings somewhere else, once the KS total gets substantial a person may wish to spread it around.
Thanks for your comments, you raised some things I hadn't thought about.
Glad you've got a great KiwiSaver but it's sobering to note that the growth you mention was achieved only on money that was in the fund as at 1 October 2007 (i.e. probably not much actual $ growth achieved).
Not to pick on Milford in particuar, but according to Morningstar/FundSource in the past year that fund has been outperformed by many - particularly the passive, market-tracking providers (ASB and Superlife), whose fee levels are very low. Paying fees at a higher level, you should expect out-performance of the index by at least 0.80% to get you level with the market tracking providers.
Again though, those figures would only apply to a new contribution made as at 2nd January 2010 - and seeing what that contribution - in isolation - is worth as at 31December 2010.
So are these reports really that meaningful to KiwiSaver investors, given that regular contributions are generally paid - not lump sums?
I would say the reporting of internal rates of return to reflect the fact that regular contributions are paid should be introduced across all KiwiSaver providers. Assuming someone on $50K p.a. has 2% & 2% paid in every two weeks will reveal very different figures and will also reflect the benefits of dollar/cost averaging. A good active manager like Milford would also see the benefit as the effect of their day-to-day expertise would shine through.
Because I am a saddo, I did this exercise with my own KiwiSaver - which has been running for about 3 years. The growth actually achieved versus what was reported is considerable (in a good way). I just knew in my water that my KiwiSaver (ASB) was actually performing better than the reported returns.
I would be interested in thoughts that anyone else has on this.
I whole hearting agree that kiwisaver is a great scheme. Interesting points made by Andy C, although would the mixing up of providers add to the fees you would pay for the scheme and lower the rate of return or would you make this up by the having a better expertise in their specailist mangement of the provider.? A question maybe Amanda could answer? I moved my kiwisaver from Westpac to Kiwibank and the return appears to be better their, although not as impressive as Red dog's
"Looking back our parents were very good savers, we're average and our kids are hopeless - because there hasn't been that savings culture,'' he said.
I agree that NZ lacks a savings culture. Culture is definitely a big part of our lack of savings.
But I'd also add that cost of living is a major factor too. When housing costs are eating up such a large share of people's incomes, then its hardly suprising that there is little left over to save.
the govt really needs to keep developing policy that encourages savings, discourages speculative housing inestment, and improves housing affordability. By doing all those things, our savings rates will improve.
It would be interesting to see what the savings rates are in a state like Texas, where housing costs are low relative to income.
in regard to the comments of Black Celebration,I would observe that investors in Milford's Aggressive Fund have not had the same Roller Coaster ride as some of the other Aggressive Funds.
This due to the fact that the wise Milford Fund Managers did not like other Aggressive Fund Managers,plunge their clients' Funds into equities at the top of the market.
They actually appeared to know more than the average lemming fund manager.
May I suggest to Black Celebration that he refers to Milford's site and its historic unit prices.
While he correctly points out that Milford has been outperformed in more recent times, I prefer to focus on longer term performance.
By way of example,Morningstar I recall publishing two year kiwisaver performance.
Selective morality.
They used 6 month performance in their survey.
They conveniently left out three year performance.
Selective morality.
There is must twisting that can be done with figures.
And of course not all fund managers have their performance included,because they are not prepared to pay for the privilege.
To me,the fees I pay for any investment are irrelevant.
If someone can use their entrepeneurial skills to give me a good tax paid return,I don't care if they want to have a decent clip of the ticket on the way through.
But if I see a fund manager only making 1.5 % per annum over a ten year period for an equity investor,while charging 2.5 % clip fees,the manager needs sacked.
Kiwisaver just provides subsidies to people who CAN save (and those who already were), while those who cannot save thanks to excessive cost of living (especially housing) lose out again.
The latest Economic Overview from Westpac asked a very good question; whether we should be focusing on "quality of investment" rather than "quantity of savings". It is possible to have high savings and still have economic distortions digging the economy into a hole.
Kiwisaver just provides subsidies to people who CAN save (and those who already were), while those who cannot save thanks to excessive cost of living (especially housing) lose out again.
True PhilBest, but I dont think those people actually WERE saving, and now they are. The recent figures seem to show a big jump in the amount of retirement savings (via KS) cf pre KS. Or have I read those numbers wrong?
Your fairness comment is interesting, although I think it applies in all directions too (working for families etc). Not something I have thought much about.
Yesterday's luxuries are today's necessities.
This concept has a vast impact on the ability of NZers to save.
My attention was recently drawn to the concept of people who are Generation Y.
I explored the internet and now understand.
I am from the generation before that,and have different values,as do most of my siblings.
Post Muldoon NZ with its free market environment,has only served to increase consumption and decrease savings.
Yesterday's luxuries are today's necessities.
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