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KiwiSaver providers question loss-making assumptions

KiwiSaver providers are raising questions about a series of prescribed assumptions they will have to use to show clients' KiwiSaver balance projections – including that defensive funds will lose money in real terms each year.

Tuesday, August 20th 2019, 6:00AM 3 Comments

Murray Harris

The Financial Markets Conduct Amendment Regulations 2019 require annual statements sent to KiwiSaver members from next year to include a total retirement savings and retirement income projection.

The Government says using the projections will help people to understand how their current contributions and investment decisions will affect their retirement savings over time.

Requiring standard assumptions would ensure investors were "comparing apples with apples", it said.

The Financial Markets Authority has since told providers that they will need to use those prescribed assumptions in their online KiwiSaver calculators, too.

But not all providers are convinced.

Murray Harris, head of wealth management at Milford, said no one in the industry had expected calculators to be captured by the requirement.

"There are so many different calculators out there and all calculators use different assumptions."

He said he could see some value in industry standardisation but there should also be the option to provide other calculators to clients who wanted to look at different aspects of the scheme.

Among the assumptions that providers will have to use is that inflation will run at 2% a year but defensive funds will only return 1.5%.

That means, in real terms, they lose money each year.

Harris said that would be a "difficult conversation to have" for providers of defensive funds.

The assumptions also apply the same expectations to a balanced fund with 30% growth assets as to one with 70%.

The MJW assumption looked conservative across all fund types, Harris said, and also assumed that investors would go to a conservative portfolio at 65, which was not always the case.

“Homogenisation is great in theory but in practice we need to make sure we can have valuable conversations with members where we can guide people through different scenarios.”

Other providers said they were having productive discussions with the FMA about the best way forward.

One, who did not want to be identified, said there should be a way to achieve the results that the regulators wanted without getting to standardisation at fund level.

Tags: FMA KiwiSaver Milford Asset Management

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Comments from our readers

On 20 August 2019 at 9:56 am Davidvs said:
The move to standardise return assumptions used in differing Kiwisaver calculators and annual member projections is another important step in recognising the role KiwiSaver will play in NZers retirement planning.

Now that they have been published the debate should be on the logic of the inputs, how often they are reviewed and who are they reviewed by (preferably those independent of providers).

This will inevitably further focus advisers and consumers on differences in KiwiSaver product costs and tax efficiency. No bad thing for the consumer.
On 23 August 2019 at 11:56 am Clive.Fernandes said:
As per the new regulations these are the assumptions to be made for returns
Type of fund (Assumed rate of return)
Defensive (1.5%)
Conservative (2.5%)
Balanced (3.5%)
Growth (4.5%)
Aggressive (5.5%)

There is a risk in using lower projected returns that we need to consider. Lower projected returns could lead an investor to take on more risk than is required to achieve his goals. If that leads a 50 year old to thinking she needs to be in a Growth Fund, when in reality long term historical averages show she could achieve her returns in a Balanced Fund - then that does not sound like a good customer outcome to me.

On 23 August 2019 at 4:21 pm Davidvs said:
Yep anyone reading the new regulations would agree they are currently clunky - in that they presently ignore variations in fund costs, investor tax rates etc etc. However with 10 year bonds at c.1% and wholesale cash rates at under 1%, subject fees and tax and the return rates above may in fact be overly generous relative to actual future KS fund returns. As every fund manager not unreasonably states - 'Past performance is no indication of future performance.'

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