From the archives: With the 2024 Budget announced this week and the continuing cost-of-living struggle, finances are front of mind for many of us. This 2022 cover story from the New Zealand Listener archives arose as KiwiSaver returns plunged. So, what advice did the experts have about what lay ahead?
By now, nearly three million people should have received their annual KiwiSaver statements. For some, it will be a useful reminder they are gradually building up a nest egg for their retirement. Others will be heeding the advice of various financial commentators that, for the sake of their mental wellbeing, it’s best not to look right now.
Major disruptions, including the Covid pandemic and the war in Ukraine, are wreaking havoc on international financial markets, where most KiwiSaver funds are invested. In the middle of June, one of the United States’ best-known indices, the S&P 500, officially entered bear territory, which means it was down at least 20% from its most recent peak.
The last time we had a lengthy bear market was during the global financial crisis (it lasted 517 days), and before that was the Dotcom crash in the early 2000s (929 days). It’s been fewer than 200 days since the S&P 500 last peaked, so it’s entirely possible things could get worse before they get better.
Rocketing prices of everything from gas to groceries are complicating the picture. In New Zealand, inflation has hit a painful 6.9%, but in the US it has already hit 8.6%, and in the UK it is predicted to hit 11% by October. The World Bank has even raised the spectre of stagflation - a nasty combination of low growth, high prices and high unemployment. What does that feel like? Just ask anyone over 60.
In the 1970s, petrol prices were kept sky-high by Arab oil states after a series of regional wars. Financial markets were spooked so badly that the Dow-Jones index, adjusted for inflation, remained stagnant for more than a decade.
Kiwis who lived through that time remember compulsory carless days, a wage and price freeze, and double-digit mortgage rates as the government desperately tried to stay in control. Could we see history repeat? Grant Spencer, an adjunct professor of economics at Te Herenga Waka Victoria University of Wellington, was the Reserve Bank’s deputy governor and head of financial stability for 10 years. Spencer says although Covid-19 and the war are pushing up prices, it’s the war’s effect on financial markets that’s now the key worry.
In New Zealand’s favour is the fact that we began cranking up interest rates before other countries, he says, although even we may have waited too long. Higher rates are intended to choke inflation by slowing the economy. Although this could lead to what is known as a “soft landing”, more people who work in the finance sector are still expecting a recession within the next year, says Spencer.
The big test, he says, is how households will cope with higher mortgage rates.
Hanging tough
KiwiSaver fund managers have been urging investors not to panic. Some have also stressed that market meltdowns can be a good opportunity to pick up some bargains. In a recent client newsletter, Milford Asset Management urged its investors to hold their nerve. “Now is a bad time for investors to sell,” said Philip Morgan Rees, head of private wealth and advice. “We understand this can test you over the short term, but experienced investors will recognise that down legs in markets offer buying opportunities.”
However, Morgan Rees also warned clients they might need to be patient. “As we expect volatility to last for some time, we do not expect to see the benefits of these opportunities immediately.”
Spencer agrees that a good active fund manager - one that doesn’t automatically track specific shares – should be able to ride out these patches. “To some extent what’s happening now has been predictable.” Economist Michael Reddell, who writes the blog Croaking Cassandra, is also sanguine. The chance of a recession in New Zealand is about 75%, he estimates. But he doesn’t think stagflation is likely.
Despite high inflation. New Zealands economy is not doing badly, Reddell notes. Unemployment, for example, is remarkably low. He doesn’t think the Reserve Bank will need to increase interest rates as high as it has been threatening to do, and remains hopeful that inflation will be brought under control within a couple of years.
In the medium term, says Reddell, Russia and Ukraine will find a way of exporting their products. Longer term, Russia may find a home for its oil in China or India, which would eventually mean lower oil prices and remove a major cause of inflation. But in the meantime, the World Bank seems pretty gloomy. It predicts the war will cause a “major recession” in Europe and Central Asia, and that global growth will slump to 2.9% this year.
On the roller coaster
Like Reddell, Simplicity managing director Sam Stubbs does not expect a long period of stagflation, simply because governments and banks have better tools today. Stubbs prefers to see market downturns as simply a fact of life. “People have got used to their returns going up over a long time. Financial markets are a roller-coaster - this has been a healthy correction,” he says.
Simplicity is a proponent of passive index funds, which take a “set and forget” approach to investing. The advantage for investors is that passive funds generally have cheaper fees, because they are not so expensive to manage. Years of academic research appear to show they tend to be just as successful as actively managed funds over the long term, although active fund managers like to point out that over the short term, investors in passive funds can have a much rockier ride. Stubbs is a manager, not a financial adviser. But he is happy to repeat some well-known rules that he has shared with his own family. He has told his kids to start saving for their houses with a growth fund, to get a high return over time. About five years before they plan to buy, they should change to a balanced fund, because it’s less risky.
And in another three years, they should change to a conservative fund. “The closer and closer you get to that date, you should de-risk your investment.” Retired people are likely to need to withdraw some KiwiSaver money on a regular basis, and the natural inclination is to change the whole lot to conservative. But that can be a mistake, says Stubbs, because many of us live for a long time after retiring.
According to Stats NZ, a 61-year-old Kiwi woman is expected to live until she’s 88. Although she is likely to spend less towards the end of her life, that’s still as many as 23 years of post-retirement living to take into account. “People are inclined to be overly conservative, which means their money can run out too soon,” says Stubbs. So keep your money in a growth fund if you can hack it, he says, and set up a regular withdrawal on the same day as your Super is paid.
It can also be a mistake to switch to a less risky fund once the market has already plunged. If it goes back up, you’re likely to cement your losses, and miss out on the upside. Many people made this mistake in 2020 when Covid spooked the markets. People who can’t bear to see their funds fluctuate too frequently would be better off in a balanced fund - typically split 50/50 between stocks and bonds, says Stubbs. A well-diversified fund, with many different investments, should give a better return than cash. Personally, he also has a cash fund for emergencies.
If people start saving early enough, then putting away the equivalent of a cup of coffee a day, as the government advises, should automatically adjust for inflation, says Stubbs. If that coffee costs $5.50, that’s $2000 a year. But many Kiwis are not saving that much.
Massey University conducts an annual study that provides a useful starting point for savers contemplating how much they might need in retirement. Its latest Retirement Expenditure Guidelines, released last November, calculated that a couple living in our main cities in June 2021 would need $809,000 to fund what it calls a “choices” lifestyle. A single person would require $688,000.
Closing the gaps
It is not surprising, then, that [former] Commerce and Consumer Affairs Minister David Clark has ordered officials to consider changes to KiwiSaver, to encourage most of us to save more. However, it has been reported that the review is unlikely to deal with several issues already identified with the scheme.
One of those issues is that women, on average, have difficulty putting as much into their KiwiSaver accounts as men. “KiwiSaver was set up with a male lens,” says University of Auckland economist Susan St John. The average gap between men’s and women’s average KiwiSaver savings is now 20%. Men have saved an average $32,553 (over all age groups) compared to $27,061 for women.
This gap widens when women take time out of work to have children and is still there at age 65. On average, women in their 40s have KiwiSaver balances approximately $10,000 (or 30%) lower than men’s. Women in their 50s have approximately $13,000 (or 32%) less in their accounts.
The Retirement Commission’s director of policy, Suzy Morrissey, says the gap also reflects the workforce gender pay gap and the higher percentage of women in part-time work compared with men.
St John has suggested several reforms, including bringing back a $1000 kick-start from the government. Women who are full-time mothers should still be able to receive the government contribution in the form of a care credit, she says. But these suggestions have so far fallen on deaf ears.
Retirement Commissioner Jane Wrightson would like to see employers continuing to pay KiwiSaver contributions while women are on maternity leave, as well as better education “to get them thinking about their long-term plans sooner”.
Another challenge is that about 20% of employers deduct their own KiwiSaver costs from their employees’ pay, negotiating what’s called a “total remuneration package”. The government may clamp down on the practice, because it can discourage people from saving for their retirement. Another flaw with KiwiSaver is that contractors, freelancers and small-business owners can struggle to save as much as people in traditional careers. According to the Retirement Commission, there is no research on this. But banking expert Claire Matthews, of Massey University, says self-employed people who can afford it should save extra, to make up for missing out on the employer’s contribution - unless, of course, they’re expecting their business to be worth a sizeable amount when they retire.
One thing that is not in dispute is that the younger you join KiwiSaver, the better the end result is likely to be. Like all fund managers, Stubbs would like to see the scheme become compulsory. While there are valid arguments against this idea, Stubbs believes one improvement would be including children in the scheme and giving the government contribution to them instead of adults. That way, “a kid could use the fund to pay for university fees, and beyond that, potentially for a house deposit,” he says.
It’s entirely possible the government contribution may be tweaked in the current review, or possibly even dropped. But the government may also feel it needs to do something to ensure the scheme remains attractive. Fifteen years after it was set up, the number of KiwiSaver members fell slightly (1.1%) last year, and this year’s market ructions are unlikely to help.
Amid all the gloom, it’s worth remembering, says Spencer, that the markets have survived bigger shocks before, such as the GFC. “People thought the world, in terms of the economy, was coming to an end,” he says.
For those who are still contributing to KiwiSaver, there is some solace knowing that you’re now buying units in your fund at much cheaper prices. This should pay off once the market rises again. For those who are retired, or near retirement, it’s also worth remembering that you’re likely to outlive this latest crash, maybe by many years. In any case, it’s probably too late to panic - the really smart money already moved several months ago.
Risk and reward
It pays to compare fees and returns and get independent advice before switching funds.
This year’s KiwiSaver statement says the Financial Markets Authority’s director of investment, Paul Gregory. For example, the fees are clearly displayed in dollar terms, as is the money your fund has made - or lost - in the past year. Gregory advises people to look closely at these two figures and if they have questions, then phone the provider. “High fees are not necessarily bad if you are getting value for money,” he says. A good fund manager “should be able to do well, after their fees, over a period of time”. If the fund manager has had a bad year, ask them why. If you’re not happy with the answer, or they don’t return your call, it might be time to shop around.
To compare funds, go to the Sorted website, or use the KiwiSaver Tracker on the FMA’s site. You can, for example, compare performance over the past five years and rank funds for. If you think your fund manager’s fees are too high, one option you could consider is a passive fund. These automatically track specific shares, and tend to have lower fees. If you are considering shifting funds, you should get financial advice first, says Massey University associate professor Claire Matthews. She says it’s probably better to pay for the advice rather than see advisers offering it for free, because they may be getting a commission from the fund manager they will shift your money to.
If you don’t choose your own fund when you sign up for KiwiSaver, you will be allocated a default fund. However, too many people stay in one of these funds, says Matthews. Until recently, default funds were conservative funds, which mostly invested in bonds. These tend to offer low but relatively stable returns. Since December, default funds have been balanced funds, which means their investments are slightly more risky, but should produce slightly higher returns in the long term. The general rule is that the younger you are, the more risk you can afford to take. If you’re not going to be using the money for at least a decade, you can probably afford to invest in a riskier fund such as a growth fund, which should generate higher long-term returns.
Waving the stick
Between them, New Zealand’s 28 KiwiSaver fund managers control more than 600 funds. So far, there have been no failures, but how much of that is due to good luck rather than good management? In Australia, which has had compulsory superannuation since 1992, the Australian Securities and Investments Commission (ASIC) has been getting tough on errant fund managers. One manager spent up large on a corporate box at the Australian Open. And when ASIC surveyed providers, many didn’t answer key questions. Following law reforms, ASIC can ban a poorly performing fund manager from accepting new members and even force it to combine with a better-managed fund.
Two years of poor returns is sufficient. ASIC can also control how much money providers spend on marketing, and now bans managers from trying to influence public opinion. On this side of the Tasman, the Financial Markets Authority doesn’t have the same powers. Badly performing KiwiSaver managers can, however, be suspended and even struck off, says investment director Paul Gregory. Funds also have a supervisor to help keep them honest. In 2015, Milford Asset Management agreed to pay $1.5 million to the FMA after one of its traders was investigated for potential market manipulation. The agency also took legal action against the trader.
“There really does need to be the shadow of the stick,” says Gregory. It’s worth noting that Milford has since won many industry awards and remains a popular provider, even though its fees can be higher than some of its competitors. Last year, the government reviewed the default provider scheme, including changing the settings of the funds, and imposed “responsible investment obligations”. AMP, ANZ, ASB, Fisher Funds and Mercer were dropped from the list of default providers and Simplicity and NZX’s SmartShares were added. BNZ, Booster, BT Funds Management (Westpac), and Kiwi Wealth have remained default providers. The new providers were selected because they offered lower fees and higher levels of service, said Finance Minister Grant Robertson.
This story originally appeared in the July 2-8, 2022, issue of the New Zealand Listener.
