KiwiSaver contribution decision a missed opportunity

The Government has missed a chance to improve New Zealanders' retirement investment outcomes, Morningstar research shows.

Wednesday, June 14th 2017, 6:00AM

by Susan Edmunds

Chris Douglas, Director of manager research ratings, Asia-Pacific

Morningstar has released a new report, Mind the Gap, which shows the difference in individual investors’ outcomes compared to the asset class as a whole.

It calculates fund returns using asset-weighted calculations as opposed to time-weighted returns and takes into account all monthly inflows and redemptions and their compounding effects over time, as well as measuring the experience of a typical dollar invested.

Over the 10 years ended 2016, the average US investor in diversified equity funds had a 4.36% return, but the average diversified equity fund returned 5.15%. In bonds, the average investor received a 2.99% return, versus 3.72% for the average bond fund.

The report found investors with automatic investment plans did better than their peers with more investment freedom, wherever they were in the world.

Morningstar said that was because people tended to buy and sell at the wrong time.

Director of manager research ratings, Asia-Pacific, Chris Douglas, said the same findings could be expected to apply to New Zealand investors, too.

"For investors in regular contribution super schemes versus open-ended funds, whether they invest when they want to, there is a better experience when you are investing in systematic processes because it's regular saving and you're not trying to time the market. It takes all the emotion out of the exercise."

Douglas took issue with the Government's decision not to follow the Retirement Commissioner's suggestion to increase KiwiSaver minimum contribution rates.

Diane Maxwell wanted the minimum employer and employee contribution rate increased from 3% to 4% and optional levels up to 10% added.

In response, Commerce Minister Jacqui Dean said there was limited evidence this would raise savings rates.

But Douglas disagreed. He said it would have been a good first step and was a missed opportunity to give investors protection from the behavioural factors that blunted returns.

Beyond that, he said people should choose an investment strategy and follow it in a disciplined way, without getting caught up in short-term market movements.

Another report analysed the transaction behaviour and investment outcomes of a million Australian Sunsuper members between 2012 and 2016.

Members in the default Sunsuper lifecycle investment option had returns of about 8.3%.

There was a much wider range of returns in the funds invested in diversified balanced strategies and self-directed investments.

In the self-directed group, in which members choose up to 10 individual options from a list of 21 diversified and single-class options, the best return over the period was 8.4%.

Downside returns for the lifecycle group were 8.1% but dropped to 5.9% and 5.1%, respectively, for the diversified balanced and self-directed options.

Paul Murphy, senior manager superannuation policy at Vanguard Australia, told Morningstar the findings were a bit surprising but a strong endorsement of the default strategy and choice architecture of the MySuper framework.

He said very few people had extreme allocations such as 100% cash or 100% equities. "This contrasts with the findings in the latest iteration of the US study, where around 6% held concentrated asset exposures--though this has been trending down significantly, falling from 20% over the last decade."

Tags: KiwiSaver superannuation