Six into one doesn’t add up
Replacing the six KiwiSaver default schemes with a single, low-cost scheme would mean dismantling “the most successful public/private partnership in this country’s history”, according to Tower Investments CEO Sam Stubbs.
Thursday, February 3rd 2011, 7:34AM 
14 Comments
by Benn Bathgate
Speaking in the wake of the Saving Working Group's recommendations for encouraging greater saving among New Zealanders, Stubbs said he thought it was unlikely the current system of six default schemes would be changed.
The report recommended the creation of a single fund to reduce costs, fees and expenses in an effort to boost investment returns.
"I don't think the Government is going to be interested in nationalising one of the most successful public/private partnerships in New Zealand," he said.
"Why would the Government want to change it?"
Stubbs was also adamant that in its current incarnation, the funds were already low cost and offered excellent value.
"Default schemes are already the lowest cost saving schemes in the industry by far, not a little bit."
He also said a lower cost scheme, achieved through indexing, would provide lower investment returns over time and that the SWG, "forgot to mention how much lower returns people will get - this is not theory, this is fact."
Another area where Stubbs disagreed with the SWG was their recommendation against KiwiSaver compulsion.
Stubbs believes the arguments for compulsion mean "it's not a matter of if but when," with the most telling argument being, "the people who need KiwiSaver the most are not involved."
There are some aspects of the report Stubbs was positive on.
He backs the calls for increasing the default rates of contribution and for the development of an annuities market, a recommendation he said recognised the need to be "thinking about the whole lifecycle of savings."
However, he acknowledged the difficulty in pricing annuities and said they work best when people are compelled to have them, citing the UK example.
Not only does that provide the scale necessary but it helps ensure the viability of the annuity providers - essential if people are to have the confidence to invest their retirement savings.
He also said the existence of just one default scheme would prove a disincentive to providers from entering an annuities market.
However, with the creation of an annuities market also a potential boon for fund managers, he said the issues were by no means insurmountable as, "the market is going to be very good at providing these solutions."
Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz
| « KiwiSaver compulsion not recommended ‘at this time’ - SWG | KiwiSaver mismatch a 'huge challenge' for advisers » |
Special Offers
Comments from our readers
More meaningfully, fees divided by returns would give a ratio of value-added, akin to the Sharpe Ratio.
The imperial evidence suggests that they both contribute at various times of the cycle (with many active managers suggesting that they have the ability to add value throughout all market conditions). In the end it is up to the consumer (and their advisers) to determine the most appropriate perspective to suit the consumer’s needs.
To compress the six default Kiwisaver funds into a single entity would remove the consumer’s ability for choice. This ‘one size fits all’ approach will have significant individual issues – as well as heightening the level of systemic risk (ie: what is the impact on society if the proposed single entity gets it wrong?).
Choice is a good thing. Refrain from tinkering with the real objective - which is to get folks saving for their own retirement.
Having one default provider is so blindly obvious its child-like in its simplicity. Anything else is a sop to the corruption and old boys network that is the so-called "public/private partnership" in NZ. If consumers want private alternatives - fine - but we only need one (1) default provider.
The default providers are providing a cash-like return less frictional costs and that is plain dumb both for the individual and the economy. It is only good for the providers. Our country has built a very competent asset management team in the Super Fund who could quite competently manage a default scheme to a conservative and liquid mandate without having to carry a profit motive. If individuals want choice they can opt for whichever non-default provider pleases them.
And Independent Observer is confused (not just about the difference between "imperial" and "empirical") as choice has been proven empirically to detract from investor's ability to capture long run asset market returns. That is the one of the bases of behavioural finance. All other things being equal, choice is economically bad, not good.
And while we are on it, it is mathematically highly probable that the average return of all passive strategies in any asset class will closely equate to the average return of all active strategies within that same asset class (both net of costs) assuming that they collectively form the bulk of capital in each asset class and private investors on average underperform professional investors. At least with active management you have a chance.
Personally, I would say changes will definately have to be made to encourage savings.
1. Make it compulsory, but contributions should be before tax, not after tax. Drop the govt contribution of up to $1040 a year to offset the impact of a lower tax take.
2. Start with 4% from employee and 1% from employer, gradually increasing it to 8% (employee) & 4% (employer).
3. Options on KiwiSaver:
a) Invest in managed funds (capital not guaranteed by govt)
b) Invest in tax-free returns govt bonds (capital + returns guaranteed by govt). Govt can use this monies for building infrastructure, etc.
c) Use for mortgage repayment / deposit for owner occupy homes only (not guaranteed by govt).
Currently, there is not choice. Choosing between management funds is not a choice, it is the same type of investment vehicle.
4. Funds in KiwiSaver to be protected from creditors and matrimonial split up.
During 2010 money held in CASH could have earned 2.27% in a call account with no fees. However, it could have earned 3.83% or 4.45% after fees with two of the big wholesale fund managers that charge 20 to 25 basis points. A fixation with low fees would have meant a 2% lower after-fee return to members.
NZ has a shallow stock market where almost all active managers beat the passive index by underweighting Telecom and avoiding dogs. Active management costs money but also makes much more money than the extra fees. If you hold down fees managers will not spend sufficient time conserving value.
If there was, then I'm sure they would tell us and everyone will be investing with them.
It's not fair to claim, on behalf of all active managers collective success in comparison to index-tracking funds. I think this is what some people are doing when they champion active management.
You can't invest in all of the active managers (think of the fees!) and then select retrospectively the one that happened to out-perform.
The compression of the various default Kiwisaver providers into a single entity removes consumers right to choice, and exposes the Kiwisaver program to a significant systemic risk. You can’t take away or restrict that fundamental right.
Whilst I am a strong advocate for active management, consumers must have choice available when constructing their retirement nest-egg. The current number of default managers is woefully small, and should be expanded (not contracted) to include a variety of investment capabilities with a variety of risk profiles and price arrangements.
Having multiple default providers was originally predicated on ideas such as: the state shouldn't be the default investment manager; share the dosh round a small number of private sector managers (to mitigate investment management risk). Reducing the number if default providers to one tips these ideas on their head - you may as well give all the money to the Guardians or ACC investment teams to manage!
You start by appearing to be pro-consolidation, then go on to appear pro-choice.
In case you missed my point – I’m pro-choice.
Commenting is closed
|
|
Printable version |
|
Email to a friend |
