Playing catch-up with Kiwisaver

By Geoff Cumming

Are you saving enough for your old age? Afraid to even think about it? Geoff Cumming explores why the retirement savings debate is back in the spotlight and how we could make things easier for ourselves

Most members have contributed at the lowest rate and the numbers contributing at the lowest rate have increased. Photo / Getty Images
Most members have contributed at the lowest rate and the numbers contributing at the lowest rate have increased. Photo / Getty Images

There's a new money game catching on with those dreaming of a long and comfortable old age. No, it's not Auckland-ised Monopoly, nor the ever-popular rental investment property game, it's retirement fund envy. It's slowly dawning on players that, unless they change the game, they won't have enough to live on in retirement.

This creeping envy takes two forms. The first is Kiwisavers in conservative schemes chugging along at 6 per cent annual growth who see those in growth schemes racing ahead at 20 per cent this year. Their dilemma is which way to jump, given the uncertainties associated with global markets, their so-called financial illiteracy and a lingering mistrust of financial advisers.

The second kind of envy is transtasman, being promoted by the Financial Services Council, which claims that even those putting away 10 per cent of their income will continue to fall behind their counterparts in Australia. According to the FSC, Australian graduates who spend their working lives on the median wage will end up with more than twice the retirement income of their New Zealand equivalents, thanks to their long-established compulsory superannuation scheme, higher wages and a phased move from 9 per cent to 12 per cent of income.

Most New Zealanders accept that our State-funded pension - national superannuation - cannot keep pace with the juggernaut of an ageing population fuelled by babyboomers living far longer in retirement than earlier generations. On top of that, the time-honoured default retirement savings plan - downsizing the family home, the mortgage long-since paid off - is increasingly off-limits for a generation saddled with student loans, raising children later and locked out of an over-inflated housing market.

Kiwisaver is just 6 years old and on the face of it - two million players representing 62 per cent of working-age New Zealanders and a pot already worth $15 billion - a great new addition to the savings game. But even with Kiwisaver, most people now entering the workforce will end up well short of the savings they need unless changes are made, the council warns.

There are good reasons for players to take stock of their game strategy right now - not least because it's Labour Weekend and what's the point of slaving for 40 years to spend the next 20, and longer, in penury? The diversion card is Winston Peters' attack on "ticket clippers" who are draining millions in fees from Kiwisaver accounts. While the admin and management fees - $130 million a year and growing - are significant, the Financial Markets Authority has already moved to improve transparency while Peters' remedy - a State-guaranteed fund provider - would undermine existing schemes.

Of more concern is the tax system, highlighted at a conference last week on the future of superannuation. The FSC pointed out that though retirement savings are taxed and re-taxed, investors in rental properties enjoy deductions on interest on debt and escape a capital gains tax.

Days later, the Government caused dismay by doing nothing about another emerging threat. Its review of default Kiwisaver schemes left in place rules which lock default fund managers into conservative, less risky investments - despite growing consensus that growth portfolios targeting shares and property are the place to park your money for the next few years. According to Kiwisaver analysts Morningstar, more than half the Kiwisaver pot is invested in cash and bonds with just 44 per cent in growth assets.

In a discussion document, the Commission for Financial Literacy and Retirement Income (aka the Retirement Commissioner's Office) advocates changes to address the tax anomalies and to phase in a higher qualifying age for superannuation - a change John Key famously made a resignation issue. It all adds up to mounting pressure on the Government to address the retirement savings playing field without turning Kiwisaver into a political football.

How much is enough?

The commission is not as gloomy as the FSC about the future - it depends on how much we'll really need over and above NZ Super for an enjoyable retirement spanning 25 to 30 years. The council claims a nest-egg of between $300,000 and $450,000 is needed, depending on how the money is invested in retirement. Its sum is based on Horizon Research surveys suggesting most New Zealanders believe they'll need about double the pension (currently $350 a week for singles or $536 for couples) to sustain them in retirement. Rather than the combined 6 per cent (employer and employee) which most wage earners are putting in, our contributions need to be at 10 per cent of income over 40 years under current savings and tax policies, it says. And only 6 per cent of members are contributing 10 per cent or more.

The commission uses other research to suggest a savings target of about $150,000 should suffice. Its discussion document suggests average wage earners on $1000 gross a week should reach the target by putting $30 a week into Kiwisaver, with their employer matching their 3 per cent.

Are we keeping pace?

Trouble is, most Kiwisavers won't reach even the lesser figure if current strategies continue. The median contribution has been around half what's needed, or an annual $829 and 17 per cent of those enrolled are not contributing.

Another 15 per cent don't know how much they're putting in. More than half of those eligible (over 18) did not contribute enough ($1042) to gain the full Government contribution of $521. Women lag well behind men in their contributions, particularly those in their 30s and 40s who have taken time out to raise children.

Worst off are those who need Kiwisaver most - lower income earners with less chance of getting on the property ladder and less capacity to save.

The council floats options to help - from allowing people to start on a 1 per cent contribution, split between employer and employee, to making Kiwisaver compulsory (supported by 67 per cent of respondents to a survey). "Currently there is no option to start at 1 per cent and steadily move up contributions by say 1 per cent each year," says the council.

Default funds

Nearly two-thirds of the Kiwisaver pot is invested in defensive and conservative funds oriented towards less risky investments such as fixed interest and bonds rather than "growth" funds which target shares and property. They include the "default" funds in which around half of contributors were originally placed and 64 per cent have never moved from. As financial commentator Bernard Hickey points out, this was no bad thing when Kiwisaver's fledgling years coincided with the global financial collapse. Morningstar's surveys show conservative funds at least matched the more volatile growth-oriented funds over the first five years. But now, stock markets are booming and interest rate rises are on the way, hurting fixed interest-oriented funds. Growth and aggressive funds have enjoyed returns of 17-19 per cent in the past year; default portfolios restricted to a 25 per cent stake in shares and property have grown by 6.6 per cent.

FSC chief executive Peter Neilson says an average wage earner saving 6 per cent (including employer contribution) in a conservative fund for 40 years will end up with a nest-egg at least $150,000 smaller than if they invested in a balanced portfolio and $250,000 less than in a gross fund.

In a review of default scheme arrangements this year, the finance sector urged the Government to relax the restrictions on default fund managers but the Government last week opted to leave the conservative restrictions in place until at least 2021.

Financial nous

Default schemes were seen as important to build confidence in Kiwisaver after a series of local and global financial scandals and the GFC. It was assumed that as confidence grew and people took more interest in their nest egg, they would opt into schemes tailored to their circumstances and "investor profile". But most have never moved and around a quarter of all contributors remain in them.

This is not just down to our legendary limited financial "literacy". Many are far too focused on day-to-day survival to spend time tracking their retirement fund progress. Many remain suspicious of financial advisers or engaging investment managers to actively manage their funds, and the costs involved. Even for those who keep an eye on market trends, the risks and unknowns can be overwhelming.

Until disclosure and reporting improvements which have just taken effect, it was difficult to gauge and compare fund performance, fees and risk profiles. Now, analysts have a more comprehensive picture. The commission's sorted.org.nz website will launch an interactive tool next month, allowing schemes to be compared. Default scheme members can expect better information with the Government requiring fund managers from next June to offer investor education "to encourage default members to actively choose which fund they should be in".

But there's a standard warning against using past performance to predict future fund performance - switching schemes is not as simple as changing electricity companies.

Tax

The council struck a chord when it rounded on the tax advantages enjoyed by property investors, including the ability to claim deductions on "losses" and avoid capital gains tax.

By contrast, it claims the tax system will erode compound interest on Kiwisaver investments by more than 50 per cent, for someone saving for 40 years. "The longer you hold Kiwisaver, the higher the effective tax rate you pay," says Neilson. The impact is worst on those in conservative schemes. It has unveiled a package to level the taxation playing field so Kiwisaver investments face the same effective tax rates as property investments. This would have to be paid for by axing existing incentives such as the $521 maximum State "top-up" on annual contributions and perhaps the initial $1000 enrolment bonus.

National Super

The cost of NZ Super is projected to nearly double by 2060, from about 4.6 per cent of GDP to 9 per cent. The commission suggests changes including fixing the proportion of those receiving NZ Super at 32 per cent, so the qualifying age would gradually rise. Today's 25-year-olds would receive NZ Super at age 68.

The 10-year-old fund intended to help bankroll future payments was worth $23.17 billion in May, growing at around 9 cent a year before tax. But the Government's decision to suspend contributions to the fund during the GFC, and its subsequent decision to extend the suspension until Crown debt falls below 20 per cent of GDP, isn't helping. Contributions are predicted to resume in 2020/21.

Commentator Bernard Hickey says the decision will cost his daughter's generation at least $40 billion in lost investment returns by 2040.

- NZ Herald

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