As Halloween approaches, it's time to look at zombie KiwiSavers
Tuesday, 29 October 2019
OPINION: Albert Einstein said the definition of insanity was doing the same thing over and over again and expecting a different result.
This is what we have been doing with KiwiSaver for the past 12 years.
On the face of it, KiwiSaver looks like it's going great guns, with 2.9 million members, $60 billion invested and average balances close to $20,000.
However, if you lift up the covers a little it looks more like my old school report: doing okay but could do better.
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The facts speak for themselves.
More than 1.1 million KiwiSaver members are not contributing at all.
Some 400,000 are still not active members and still sit languishing in a default fund.
Close to 500,000 members have not received their full member tax credit of $521, which means they haven't put more than $20 dollars a week into their KiwiSaver scheme each year.
A large proportion have their savings invested in very conservative funds, which means around 80 per cent of their savings are in cash or fixed interest.
There is still a large number disengaged with their KiwiSaver fund, who have just ticked the box and think their retirement is sorted.
Access to KiwiSaver for low income earners is difficult and widening the financial gap between those in KiwiSaver and those who aren't.
Many members are not getting employer contributions on top of their own contribution.
Lastly, 109,000 people are on contribution suspensions, and are not contributing anything to their KiwiSaver accounts.
Thankfully the Ministry of Business, Innovation and Employment (MBIE) is reviewing KiwiSaver default providers and looking at other aspects to ensure KiwiSaver plays a significant role in New Zealanders' financial wellbeing when they retire.
I should disclose now I work for Mint Asset Management, a boutique New Zealand-owned fund manager that currently does not offer a KiwiSaver scheme.
Previously I worked at the Commission for Financial Capability and contributed to the 2016 Review of Retirement Income Policies.
As part of that review we did an extensive amount of work looking at KiwiSaver and had some changes approved by the Government.
MBIE has now sought submissions to the KiwiSaver Default Provider Review.
Mint submitted a number of ideas that not only nudge, but aim to propel KiwiSaver into the next decade, with a far better outcome than my school report.
We recommended the Government:
1. Remove the default provider status (currently there are nine) and open it up to all KiwiSaver scheme providers. Some won't put up their hands because they want higher income members. But for those that do, this will help spread the load of supporting new members and getting them out of the parking spot otherwise aptly known as the default funds.
2. Reallocate those non-active default members to the new default fund providers. This may trigger the incumbent default providers to do more, but also prompt those members to demand a better option from their providers
3. Give all new auto-enrolled members a balanced fund asset allocation of 50 per cent shares, and 50 per cent cash and fixed interest.
4. For all current default members who do not actively change funds, put their future contributions in a balanced fund. This will slowly move them up the risk return ladder, but mitigate any short-term losses of capital if markets correct in the near future
5. Bring back the $1000 kickstart for new members who make an active choice. There's nothing like a little bit of folding cash to incentivise people to make a decision.
Another area that I am really worried about is employees who are not getting their employer's KiwiSaver contribution on top of their income.
I believe more and more employers are putting their staff on contracts which let them escape making employer contributions. That may be partly why we are seeing a growing number of non-contributing members in the scheme. The intention of KiwiSaver has always been that employer contributions should be on top of your wages not part of.
While not solving all the issues, these will help to really improve the financial outcomes of more Kiwis when they retire.
I did some calculations on the Sorted website, looking at two 30-year-olds earning $80,000 a year, and contributing 3 per cent of their salary.
They both join KiwiSaver on the same day, one gets allocated to the default fund and the other chooses a balanced fund. Not taking into account inflation, the first member will end up with around $405,000 and the second with $479,000, an additional $74,000.
Kind of highlights my first point doesn't it? We have to change things if we want a better outcome.
*David Boyle is head of sales and marketing at Mint Asset Management. He joined Mint from the Commission for Financial Capability, where he was responsible for investor education, and advocating for law changes to make KiwiSaver work better.