CFFC calls for seven changes to KiwiSaver
The Commission for Financial Capability has recommended to the Government that KiwiSaver providers should disclose the total dollar cost of all fees on annual statements in its just released 2016 Review of Retirement Income Policies.
Thursday, December 8th 2016, 2:11PM 
7 Comments
by Owen Poland
In the first part of a two-phase release, the CFFC has recommended a series of immediate changes that Review Manager Scott McMurray believes could make a significant difference to New Zealanders’ balances and retirement outcomes. "They are aimed at making it easier for people to save more for the future and provide greater flexibility and certainty over their retirement savings” he says.
The 7 key recommendations are:
- Increase employer and employee contributions from 3% to 4%:
- Automated option to increase member contributions by 0.25%, 0.5 % or 1 % up to a capped maximum rate.
- Add 6% and 10% to increase the range of employee contribution rates options.
- KiwiSaver providers to disclose the total dollar cost of all fees on annual statements.
- Decouple the age of access to KiwiSaver funds from NZ Superannuation
- Change the name of ‘contributions holiday’ to ‘savings suspension’ and reduce the maximum time to one year.
- Allow people over 65 years to join KiwiSaver.
CFFC says that an increased employer contribution will boost the incentive to become a member, and that raising the minimum contribution rates will result in a substantial increase to KiwiSaver account balances in the long term. For example, a 20 year old earning $40,000 would increase their KiwiSaver balance by $82,767 to $ 362,142 by contributing 4 per cent rather than 3 per cent.
On the topic of fees disclosure, CFFC says a dollar fee is easier for most people to understand and would improve transparency and trust. Policy work has already begun on regulations requiring schemes to provide members with actual fees paid in dollar terms which CFFC says will enable easier comparison between different schemes and promote competition.
Other non-urgent recommendations for KiwiSaver include;
* more research on understanding non-contributing members which number around 1.1 million of the 2.3 million eligible members
* Allowing membership of more than one KiwiSaver scheme
* Exploring decumulation options
CFFC believes that membership of more than one scheme would not reduce provider risk because funds are invested in underlying assets and not connected to the financial strength of KiwiSaver providers. As for decumulation options, it says there has been a lack of annuity products to provide older people with a regular income and help manage their assets but as KiwiSaver balances grow and demand increases, it is expected that KiwiSaver providers will innovate and offer more drawdown options for members.
The 2016 Review of Retirement Income Policies is also calling for a national conversation' and attitude change toward older workers which includes retraining and career transition support for people over 50.
But whether the Government and it's new leader will be in any mood to take notice is another matter. Retirement Commissioner Diane Maxwell says she'll be seeking a "measured and considered" dialogue with the new PM and cabinet about the subject. "One would hope that a group of smart politicians who were acting as leaders would want to debate and discuss the ageing population - we know it's coming."
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Comments from our readers
He’s a nice guy but what does he “Really” know about the industry?
Two comments he has made might be an indicator – “CFFC believes that membership of more than one scheme would not reduce provider risk because funds are invested in underlying assets and not connected to the financial strength of KiwiSaver providers.”
Now I don’t profess to be a KiwiSaver expert but my understanding is that the Financial Strength of a KiwiSaver has no risk whatsoever for Members as assets are held and protected by an Independent Trustee, and are not held as an asset or liability on the provider’s balance sheet.
The other issue I am concerned with is “As for decumulation options, it says there has been a lack of annuity products to provide older people with a regular income and help manage their assets but as KiwiSaver balances grow and demand increases, it is expected that KiwiSaver providers will innovate and offer more drawdown options for members.”
History shows industry is not that great at this- high fees, loss of capital control and minimal payment to survivor spouse or estates, are all still valid reasons why Investors would be unlikely to utilise providers de-cumulation products.
Apart from that the recommendation are good with the exception of the contribution holiday being a max of 1 year. This should be 2 years as sometimes (depending on the reason for the holiday) it takes that long to get to a position to start again. By this I mean financial stress that creates a situation to stop but not sufficient to warrant withdrawal and overseas working holidays (UK max 2 years for most younger people).
Kiwisaver is locked in to a minimum age, has no tax advantages, and my third reason is the contingent one that govt might prevent you taking your money out as a lump sum and instead might force you to take an annuity.
Its not that I discourage them from saving, its just that I tell them that they should keep savings which are not incentivised sufficiently in a form that they will definitely control themselves.
I tell people to:
- put in just enough to get the govt $10 week
- or if you are an employee. the minimum you can
- any other savings should be elsewhere and not locked in
- and other saving can double as emergency funds
- in the US they recommend 6 to 8 months income in emergency funds
- why? redundancy, illness, death, earthquake, storm drought, accident, flood et al
- and if you have a mortgage from a bank, emergency funds MUST be elsewhere ( and NEVER tell your bank you have other money)
- since banks can help themselves to your other accounts anytime if you default
- your bank is not your friend if you can't pay
- since hopefully emergency funds will never be needed, they can be invested in a 40/60 portfolio, and eventually form part of of your retirement savings
For most of us, the low cost Kiwisaver from Simplicity is a no brainer first choice.
It's good to see they are already way ahead of budget, so lots of Kiwis are making a good choice.
This is the sort of analysis that I am sure would be useful for the FMA. Coincidentally the FCA in the UK is becoming more and more vocal about forcing advisors to do the right thing for clients eg. annuity providers will have to tell customers if they can get a better deal elsewhere under new rules being developed by the FCA. Maybe I am a bit stupid but this seems to be absolutely contradictory to Mr Everett’s “polo shirt” comment. The fact is, and this is obvious to anybody with a brain, that advisors who can only sell the products of the institution they work for are not putting clients’ interests first and no weasel words or FMA lawyer logic will change that. The FCA is doing some good things.
What do other people think?
Oh dear. That's going to be a bit of an issue for all those young people heading off on a couple of years OE to see the world, isn't it.
And those other expats who are out there in the global marketplace but who intend to come back to New Zealand later in life.
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I wonder if anyone is able to quantify the return on tax payers dollars spent on this organisation.
After all, it is funded by us - the population.
It is becoming increasingly obvious we have WAAYYYYYYY too much government, and it is difficult to see the purpose of many of its growing and tightening tentacles, other than to be self serving..