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Group of AFAs tackles KiwiSaver problems

A group of financial advisers says big banks are using KiwiSaver to line their pockets - and they should disclose how much money is invested in their own products.

Tuesday, July 17th 2018, 6:01AM 9 Comments

The group wants changes to the way default KiwiSaver schemes operate and has written to the Financial Markets Authority chief executive, Reserve Bank governor, Commerce Minister Kris Faafoi and Finance Minister Grant Robertson.

It is made up of John Cliffe, Phil Ison, Alistair Bean, Rachelle Bland,  Michael Lay, John McLean, John Milner, Tony Walker and John Wood.

The advisers want all default funds to be balanced options, to ensure IRD gives default managers the correct tax rates for members, to remove all members in a default fund after 12 months by switching them out, and to introduce a white-labelled government balanced fund for those members.

New default member flows should be stopped to any default provider that did not meet specific engagement and switch-out rates for members and the white-labelled fund should be told to minimise investments in Australian-owned bank securities, the group said.

Fund managers with conflicts of interest in security selection should be investigated and management fees should be refunded when they were charged for placing and keeping investments in their own issued securities.

The group also wants explicit identification and disclosure of conflicts to members.

It estimates  $1.5 billion of KiwiSaver funds are invested in securities issued by Australian-owned banks and insurance companies.

“The problems with default KiwiSaver funds are systemic and long-standing,” Cliffe said, speaking on behalf of the group.

“They are well-understood, yet little of real substance has been done to resolve them by those involved, including the banks and insurance companies, the Financial Markets Authority, the Reserve Bank of New Zealand or successive governments.” 

He said the government's decisions to keep default funds conservative rather than balanced has resulted in default members missing out on approximately $830 million over the six years ended March 31, roughly $2.7 million every week.

Many of the lowest-income earning KiwiSaver members are paying tax at the highest possible rate of 28%, when they should have been taxed at 10.5% or 17.5%.

The IRD supplies default KiwiSaver funds with default member account details but not the member’s tax rate, so unless a fund successfully contacts members and gets their tax rate, it is required to deduct tax at 28%, the maximum rate. This problem is likely to have affected the majority of those who have been enrolled in a default KiwiSaver fund.

The group said the real winners in the scheme were Australian-owned banks, which had been able to invest the default funds in their own and each other’s securities.

As at March 2018 this amounted to 31% of the ASB’s default fund, 30% of ANZ, 31% of BNZ, 27% of Westpac and 34% of AMP. If a balanced fund option for default funds was implemented, the exposure to Australian-owned bank securities would decrease by approximately $1 billion. The banks charge KiwiSaver members management fees for investing their funds in this way. 

“The FMA, Government Ministers and others responsible for overseeing KiwiSaver have frequently asserted that better financial literacy education of default investors is required along with better fund manager performance in switching out default members to solve the problem,” Cliffe said. “After a decade of failure with this approach it is time to take action.”

New Zealand Bankers’ Association deputy chief executive Antony Buick-Constable said the scheme had been designed  get as many people as possible saving for the future.

"Several of our banks offer KiwiSaver funds and that helps enormously with take-up because most of us have a banking relationship.

“The suitability of banks as fund providers is also reflected in the government’s choice of default providers for KiwiSavers who haven’t chosen their own scheme. The first six default providers selected in 2007 included one bank. Now five of the nine default providers are banks. They were chosen on the basis of strict criteria including their organisational credibility, range of investment options, competitive fees, and investment capability.

“The convenience that comes with bank providers is a factor that can’t be ignored. Many of us enjoy being able to see all our accounts online at a glance, including our growing KiwiSaver balance.

“We’re always happy to engage with the government on any proposed changes to the KiwiSaver framework that could benefit investors.”

Tags: KiwiSaver

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Comments from our readers

On 17 July 2018 at 12:34 pm Simon H said:
Well done John Cliffe, Phil Ison, Alistair Bean, Rachelle Bland, Michael Lay, John McLean, John Milner, Tony Walker and John Wood! Many of your criticisms of how default KS schemes work are well founded and overdue.

Re assigning the correct PIR rate, surely IRD could do this for most of us now? PIR rates must be based on one of the previous two income years, and IRD already has the required information for those of us who comply with tax filing rules. So IRD should automatically apply the correct PIR rate for most of us.

The balance of KS members would either be under 18 years old, or non-tax-compliant adult earners. Changing the law to put all members under the age of 18 the low PIR rate – regardless of other income – seems like be a simple, pragmatic fix for this group. Leaving non-tax-compliant members: who would still have to select a PIR number as now.
On 17 July 2018 at 1:22 pm Denis said:
I am not buying the narrative around the "wasted" millions in default funds.

Default funds have much lower fees, which is protected by legislation.

Default fund providers have a higher level of operational scrutiny and regulation than other KS providers.

Those that do not consider these facts to be important have short memories.

Let's say the markets go down 10%+ overnight, how do those non-default returns look now?

In the spirit of full disclosure, any Adviser should make it a thousand times more clear than they currently do that if their advice turns out to be wrong...then the investor is 100% on their own.

But - I completely agree with the PIR tax problem and I think the group should concentrate on that.

On 17 July 2018 at 3:11 pm John Milner said:
Denis, I'm sure you are well meaning and attempting to add some value to this discussion. However, I have no idea what you are talking about. I can only assume you haven't read the information that was posted or understood it.
On 17 July 2018 at 5:02 pm Murray Weatherston said:
Re PIR rates
I actually don't think IRD would know the correct PIR rate in all cases - while they will have details of the taxable income, they don't collect PIE income details off individual taxpayers. Recall the correct PIR is a function of both taxable income and PIE income.

Re what fund should you be in.
Is no-one concerned about each individual Kiwisaver member's personal risk tolerance? The lowest risk fund might well be appropriate for some Kiwisaver members.

Re: Bank Kiwisaver Funds investing in bank securities
So long as the banks are not creating separate issues for their Kiwisavers - what is the problem. Bank shares are publicly listed and bank fixed interest securities are generally listed. Once issued, someone has to hold these bank securities - why not a bank owned kiwisaver fund?
On 17 July 2018 at 5:08 pm Simon H said:
But all KS members have IRD numbers ....
On 17 July 2018 at 8:31 pm Denis said:
Apologies for any misunderstandings on my part, John. Feel free to put me right.
On 18 July 2018 at 10:38 am Murray Weatherston said:
@Simon H
Yes, they might all have IRD numbers but you can't tell from an IRD number what the correct PIR rate is.
I think a provider has to use 28% unless they have been (1) provided an IRD number AND (2) advised a different PIR rate by the taxpayer.
The problem is not solved.
On 18 July 2018 at 11:34 am Ron Flood said:
Dennis, it is not that there is anything wrong with the Default funds, they do have lower fees. The problem is that a majority of the investment is in the most conservative fund and there has been no advice given as to what would be the most appropriate for the client.
A 20-40 yr old with 25 -45 years to retirement, and then another 20 years retired is totally disadvantaged being left in a Conservative Fund.That is the problem.
On 18 July 2018 at 12:45 pm Denis said:
Hi Ron - not necessarily. Some people are quite happy with the MTC and the employer contributions more than doubling their money and in a largely risk-free fund with low fees operating under strong regulations. Especially if you want to use it to buy a house.

Just to be clear, I am no fan of the banks either - but the answer isn't to trash talk the default funds, as if they are a problem. They are doing exactly what it says on the tin.

Sure, people could make more money in the more aggressive funds...but that growth can be wiped out overnight because those funds are more risky and more expensive. This risk is breezily dismissed as if it's crazy talk. This can happen and it has happened.

Any good financial advice process should involve getting people on a sound footing and then - with money you can afford to lose - start to take some risks. KiwiSaver and the house you live in are your foundations. In my view, these are not to gambled with unless you can easily cope if it all goes horribly wrong.

So it's right that the default funds are conservative. If you are looking after someone else's money, you don't get to gamble with it (and take a cut) - even if you think you are on to a sure thing.

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