Prices have been in the limelight lately, but Mint’s head of sales and marketing, David Boyle, explains why we need to dig deeper to understand why Kiwi Saver members are actually hindering savings. I’m …
Monday, June 14, 2021 8:50 am
KiwiSaver pricing dominated headlines more than ever last year. In 2020, the Financial Markets Authority’s (FMA) “Value of Money” crusade first sparked, and finally culminated in the announcement of the Ministry of Business, Innovation and Employment (MBIE) default scheme. Month.
Of course, regulators are obliged to monitor fees under the authority to oversee KiwiSaver (and the broader license fund market), but the government itself has administrative fees, especially given the free allocation of new customers. I have a special interest in seeing it go down. To the default provider. The text hung on the wall last year when MBIE’s bid documents for default providers were released with a 60% weight on pricing. This is a point that will not be lost in many of the newly appointed providers. However, what matters in the low-cost world is whether the default provider can properly serve new members, which we’ll discuss in more detail later.
The just-completed default review reduced the sticker price for managing a balanced Kiwi Saver portfolio from 0.2% to 0.4%. There is no fixed annual fee for all. Comparing this to an Australian neighbor who is under the control of over A $ 3 trillion and charges an average management fee of 0.7%, it was an incredible feat.
Commerce Minister David Clark announced the new default scheme terms, stating:
Now that the pricing debate is set, it’s time to focus on the much more systematic issues of Kiwi Saver, at least for now. In particular, the percentage of members who have not contributed (and have not contributed) is high. The KiwiSaver scheme also includes resources to adequately assist members during market volatility to prevent wise switching to conservative options, especially in the market downturn that occurred after the 2020 COVID-19 crash. You need to ask if there is.
While the government has achieved reducing default fund fees to the basement level of bargains, KiwiSaver members are worth paying more attention to other ways of maximizing spending in the long run. Cost is only one side of the equation – asset allocation, return on investment, advice Contribution behavior can all be more important factors in this calculation.
The FMA 2020 KiwiSaver report classifies approximately 1.2 million members as non-contributors. This is about 40% of the total of over 3 million New Zealanders signing up for the scheme.
During my mission at the Financial Capability Commission, now called Te Ara Ahunga Ora, about half of all Kiwi Saver members heard about member tax credits (MTCs), according to a survey by the Internal Revenue Service (IRD). There was never. If you’re unaware that 1.5 million Kiwi Saver members will get $ 521 “free money” each year with a minimum donation of $ 1,040, then there’s a problem with your marketing machine.
In fiscal year 2016, approximately 1.1 million members missed the full MTC, including approximately 580,000 who received no government replenishment. I suspect the MTC dial hasn’t moved that far since then.
Data suggest that about one-third of all Kiwi Saver members donate less than $ 20 a week to save for retirement.
Governments, regulators and the industry have long been aware of the catastrophe of Kiwi Saver’s contributions and have all tried to fill the gap in some way to be fair.
Obviously, it has failed so far. Now that the fees have been paid, it may be necessary to better understand why New Zealanders are not really contributing to a fairly cheap and effective retirement savings scheme for most New Zealanders.
We can only guess why Kiwis isn’t taking full advantage of Kiwi Saver because there is little detailed research required, but there are some obvious candidates:
- self employed;
- Children; or
- Suspension of donations or use of difficult withdrawals due to true affordable issues.
However, in my opinion, the above factors do not take into account the low or zero contribution of over 1 million Kiwi Saver members.
I think the twist in New Zealand’s employment law could be another overlooked reason behind the lack of Kiwi Saver’s contribution. Under the law, the employer’s contribution was intended to be added to the employee’s salary or wage. However, important lobbying activities at the time revised the law to allow employers to negotiate transactions “in good faith” with their employees, including the calculation of employer Kiwi Saver contributions as part of the total compensation package. It came to be.
Employees who choose the gross compensation approach can choose to donate the additional amount allocated to Kiwi Saver or use it for other purposes. On paper, the gross compensation scheme offers great flexibility while maintaining equal pay for all employees, whether or not they contribute to Kiwi Saver.
However, it would be interesting if the IRD audits the company and compares the total compensation of both contributing and non-contributing employees. Do non-contribution employees receive 3% more salary than non-contribution colleagues?
More importantly, many New Zealanders currently work on a contract basis, and while knowledgeable contractors may negotiate employer contributions as part of the overall wage rate, employers You are exempt from including Kiwi Saver as part of your bargain. By the way, in my radio live show “Your Money”, in many of the extreme cases a few years ago, some employers didn’t mention Kiwi Saver at all.
There is no doubt that most New Zealand companies consider Kiwi Saver as part of their entire employee benefits program and are a responsible employer in compliance with their obligations.
We can only guess why so many registered members aren’t contributing to Kiwi Saver until more information is available.
After a government announcement in May, Minister Clark said that 18 years of entering the default fund today under a low-rate system could save an average of about $ 3,900 by age 65, which is equivalent to about $ 80 a year. .. However, inflation-adjusted real savings were about $ 2,400 a lifetime contributing to Kiwi Saver for 47 years, or $ 50 a year.
Governments and regulators have made great efforts to reduce Kiwi Saver fees. This will help to some extent, as mentioned above. However, in a broader scheme, rate savings are only a drop in a bucket compared to the long-term compound interest benefits of the contributions of all employees and employers. At the very least, all kiwis must contribute at the level of receiving MTC. This will add a total of $ 1,500 plus each year to your member accounts (excluding the impact of return on investment).
After completing the pricing survey, perhaps with a little help from the industry, the government will do more to find out why most of these Kiwi Saver members aren’t making the most of their contributions. can do. A better understanding of this issue will allow providers to find more effective ways to communicate with non-contributors and ultimately improve the retirement prospects of more New Zealanders.
David Boyle is Head of Sales and Marketing for Mint Asset Management Limited. The above articles are for informational purposes only and are not intended to provide investment advice. Mint Asset Management is the publisher of the Mint Asset Management Funds. Download a copy of the Product Disclosure Statement at www.mintasset.co.nz
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Kiwi Saver Savings: Why Donations Are More Important Than Fees
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