Q&A: Sam Stubbs talks KiwiSaver Trends

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Insights on where the KiwiSaver market is headed. In this interview, TOWER Investments CEO Sam Stubbs discusses trends emerging in the KiwiSaver market. An expert on the managed funds industry, Sam has recently been appointed to the government's advisory International Fund Services Development Group chaired by Craig Stobo.

Monday, May 10th 2010, 9:17AM

Q:  What sorts of trends are becoming apparent now that the KiwiSaver market is showing more maturity?

Sam:  Sign up rates to KiwiSaver are now well on the way to breaking 1.4 million and the next obvious milestone is the 1.5 million mark (Graph 1).  Underneath that statistic we are seeing some entrenched trends emerging for the subcategories of membership.    Opt-in via employer has basically flatlined while the other employer-connected subcategory of automatically enrolled has crept up steadily but unspectacularly.  In part this could have something to do with the employment market, as December 2009 quarter unemployment peaked at an 11-year high of 7.3%.  When the labour market picks up again we could see stronger growth out of these two subcategories.  What has pulled away markedly from employment-linked membership is opt-in via provider, where KiwiSaver members actively choose from the range of schemes available one they prefer to belong to.  Opt-in via provider is the major growth area for KiwiSaver.

What does the jargon mean?

Net total membership = The number of people remaining in KiwiSaver schemes after deducting those who exit via opt-out from automatic enrolment or for other reasons (such as being ineligible for KiwiSaver). 

Automatic enrolment = the method of enrolment for individuals who change jobs, or commence employment. Upon commencing new employment, the individual is enrolled by their employer

Opt-in via employer = a prospective member submits an application form through their employer to Inland Revenue

Opt-in via provider = a prospective member goes to a scheme provider and submits an application that is forwarded to Inland Revenue by the provider

Q: Are there other important trends evident?

Sam: Yes there are once you delve a bit further into analysis of the raw data.  For example, if you look at the percentage each subcategory represents of net total membership, some interesting patterns emerge (Graph 2).  The two employment-linked categories of automatically enrolled and opt-in via employer keep falling steadily as a proportion of the total, whereas opt-in via provider continues to rise.  Then if you consider monthly percentage growth rate changes for these various categories other trends emerge (Graph 3).  The general trend over 2009 for monthly percentage growth rates was down, despite the headline raw numbers figures showing ever more people joining KiwiSaver.  That effect bottomed out in December 2009 for all membership categories, with the exception of automatically enrolled.  That subcategory hit bottom in September 2009, probably in sympathy with rising unemployment.  Falling monthly growth percentage trends for all categories have reversed over the first quarter of 2010, with growth now trending back up.  There could be signs in this trend reversal of greater optimism in the economic outlook as recorded elsewhere in confidence surveys.  More attention should probably be paid to these sorts of KiwiSaver trends as diagnostic of the state of the economy.

Q: Would you regard these trends as showing whether KiwiSaver is reaching membership saturation point?

Sam: Not at this stage and certainly there are a lot of people left who could join but haven't yet.  That said, it is worth noting that as of March 2010, nearly a quarter of a million New Zealanders had opted out of KiwiSaver (SOURCE http://www.kiwisaver.govt.nz/statistics).  So unless some of those people change their minds, they could be considered as permanently out of the KiwiSaver market.  If the opt-outs had stayed in, we would be pushing towards 1.7 million KiwiSavers by now.  Then there will also be a proportion of people who feel they can't afford KiwiSaver, while some affluent individuals may conclude they don't need it.  So at a certain point we will have effectively maxed out the market for those people who are inclined to join and the kinds of trend statistics I have been discussing will signal that.

Q. Do you foresee any other trends for KiwiSaver developing?

Sam: One thing I think we will see happen is that KiwiSaver schemes will move into investing in the public private partnership (PPP) area.  You could call those arrangements public KiwiSaver partnerships or PKPs.  A lot of new infrastructure needs funding in New Zealand and you have billions of dollars piling up in Kiwisaver that could help pay for it.  KiwiSaver schemes are natural investors in infrastructure because of the long time horizons involved.  But it will all come down to what the opportunities are and whether these offer commercially acceptable rates of return to scheme members.  Additionally, only New Zealanders can invest in KiwiSaver, so the political issue of foreign investment in sensitive assets like core infrastructure doesn't arise.  The government's National Infrastructure Plan published this year explicitly stated an interest in using PPPs to get private sector input into construction and operation of infrastructure, and we have seen a couple of pilot projects off the blocks already with a school and a prison proposed.

Q. So would KiwiSaver schemes invest in prisons, for example?

Sam: Well, you could argue that the long-term investment horizons of KiwiSaver are a good fit for the lock-em-up-and-throw-away-the-key philosophy!  But seriously, whatever PKPs KiwiSaver schemes get involved with will need to be large and long-term enough to absorb the increasing pool of capital available and one obvious area for that sort of commitment would be transportation infrastructure such as toll roads, bridges and tunnels.  

TOWER is a default KiwiSaver provider and FundSource Fund Manager of the Year for 2009*. In the Workplace Savings NZ Communication Awards 2009, TOWER Investments won Investment Statement of the Year for its KiwiSaver scheme and also Best Other Workplace Savings or KiwiSaver Communication for its KiwiSaver-linked Cash4Schools school donations programme.

Further information

For a copy of the TOWER KiwiSaver Scheme investment statement and information on the TOWER Cash4Schools school donations programme contact 0800 808 808, or email investments@tower.co.nz or visit www.tower .co.nz/kiwisaver.

*Per award announced on 3 December 2009 by FundSource, the investment strategy and research company.  This Award should not be read as a recommendation by FundSource.  For further advice on the relevance of the award to your personal situation consult your financial advisor, or visit www.fundsource.co.nz.

The opinions expressed in this interview are those of Sam Stubbs only, and not those of TOWER, Lighthouse Superannuation Nominees Limited, or the Scheme.

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