Advisers welcome more detailed projections
New Zealand's financial advice sector is cautiously optimistic about plans for KiwiSaver annual statements to show members what their projected balances could produce in income.
Wednesday, June 13th 2018, 6:00AM 
4 Comments
by Susan Edmunds
Commerce and Consumer Affairs Minister Kris Faafoi is seeking feedback from KiwiSaver providers on the introduction of the new information.
“We want people to have access to clear, easy-to-understand information that shows how their current savings are tracking towards retirement. Statements will show people an estimate of the savings they will have built-up by age 65 and the weekly retirement income that sum would provide over 25 years.
“How quickly these changes can be made to annual statements will be determined as part of the consultation we are undertaking with providers, but it is my expectation the requirements will be introduced without delay."
Former IFA president and financial adviser Nigel Tate said it was not a bad idea but the industry had seen projections before. "Consumers have been disappointed as a result of over-projected rates, so maybe but only if the rates were an average of a minimum of the past five years' returns of that client's scheme."
Conservative rates would also be needed to gauge the decumulation phase.
IFA chief executive Fred Dodds said it would be a test to see if clients cared, would inquire, how effective providers' tools were and whether they would use them.
It might also test bank advice staff, he said.
"If the questions are searching, the 350 to 400 AFAs in the banks will be busy."
He said it would also be interesting to see how many calls non-aligned advisers received because not all KiwiSaver members are with big providers.
"Hopefully the media and commentators concentrate on the 'his is a good idea'to actually get people thinking about retirement and not charge off into an undoubted criticism of fees."
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Comments from our readers
By the way does anyone know what IFA Chief Executive, Fred Dodds, means when he says "and not charge off into an undoubted criticism of fees"?
FCA last did the exercise in 2017. Their view was based on a 10-15 year time frame, which really isn't much use to a 40 year old planning her retirement, or a school leaver just joining the workforce, or even the average 65 year old just about to retire.
Imagine the howls if NZ Kiwisaver managers were restricted to the same return parameters for projections - in nominal terms (GDP deflator 2.5%) central estimate for rate of return was 5.0% (down from 6.0% in 2012) with a range of 4.4 to 5.7%.
Base portfolio allocation 60% equities, 20% government bonds, 105 corporate bonds, 7% property and 3% cash and money markets.
Yes the NZ KiwiSaver managers would be squealing if the MBIE and the FMA were as informed as the FCA but that goes for lots of other regulations in our field as well. We use a 6% forecast return for global equities, long term, consistent with most uncompromised academics. Some bright sparks add 1%-2% for hedging gains which is ridiculous.
However I would have to disagree with your comment that the 10-15 year timeframe used by the FCA isn't much use for someone with a 25 year horizon or even a school-leaver. What alternatives have you got other than the current market metrics – so many people wrongly look at historic returns but I won't bore readers as to why that's ridiculous. 30 year treasuries are a good indication of what the market expects long-term bonds to average for the next 30 years and the swaps market provides other long term forecasts. That is bonds sorted unless you assume a big rise in interest rates and the markets suggest that’s unlikely for at least 10 years. If it does happen obviously bond portfolios and equities will take a hit and take some time to recover.
As regards equities the best indication of future returns is the current earnings yield and if you assume a lower PE multiple then you have to assume some fall in equity prices and all the data of late suggests that multiples are increasing rather than falling (the rationale being that markets are less risky due to diversification and the popularity of ETF's and managed funds generally). Remember that the long term growth in dividends is inflation plus 2% so with current dividends of maybe 2.5% including buybacks 6% looks fair. Long term we assume 3-4% for bonds and 6-7.5% for equities to get a weighted average return of maybe 5.5% pre-tax, pre-fees and if you do all the numbers properly after that it doesn’t leave a heck of a lot left over. In that context fees are obviously critical.
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What would we need to make assumptions about in a projection model: for starters
1. future inflation
2. wage increases
3. future contribution rate by employee
4. future contribution rate by employer
5. future contribution by Governemnt
6. assumed rate of return investment - need separate assumption for each fund a provider offers because of different asset allocations
7. Number of years till drawdown begins
8. Asset allocation during decumulation phase.
Then factor in that projections use smooth parameters - the expected means; how do you factor in volatility?
Then how do you stop assumption arbitrage by different providers for marketing advantage?
Presumably Government would have to intervene to declare standard assumptions. How good would they be at that?
People have to understand that a projection is not a forecast of what will happen. A projection is a what a model says will happen if we assume A, B C D E and F. If any of those assumptions proves to be wrong, then all bets are off.