Finance and The Economy series: The trigger figure

Sometime soon individual KiwiSaver balances will reach what many in the financial services sector see as trigger figure for some altogether different thinking around saving.
The change will throw new focus on an organisation’s role as the connecting point between its staff and the fund providers. It will all play out in the new post-July 1 financial regulatory regime framed by revamped Financial Advisers Act and under the watchful eye of the ‘twin peaks’ of the Financial Markets Authority and the Reserve Bank of New Zealand.
Just over four years after its launch, KiwiSaver is now an $8 billion-plus treasure chest. Launched with the government aim of creating low-cost work-based savings scheme at both the individual and employer level, KiwiSaver has grown fast.
More than 1.7 million people now have cash stashed away in KiwiSaver funds. That $8 billion stockpile is tipped to hit $25 billion in four years’ time. By 2021 it could reach $60 billion.
It’s still too early to pick the exact repercussions from the recent Budget changes which watered down government subsidies. But the betting must be that the scheme has now gathered sufficient internal momentum to weather such blips.
As with so many other issues, for individual savers the devil is in the detail. Those not already in so-called exempt schemes run by their own employers can select from some 33 providers who collectively offer bewildering array of schemes taking conservative, balanced or growth stances.
They can also take their pick of single-sector funds focusing on everything from cash, shares, fixed interest, property or social responsibility.
Overcome by inertia, many workers have simply stayed away altogether. Paralysed by choice, others end up plumping for one of the six government-selected default providers where their dollars are stashed into funds at the lower end of the perceived spectrum of risk.
So far, Kiwis’ collective savings behaviour has largely been characterised by what OnePath’s general manager funds management David Boyle describes as “set and forget” mentality. As nation, it seems we close our eyes, take an almighty jump and then – wherever we land – lie very, very still.
Catherine McGrath, ASB’s chief executive of customers, markets and products, says individuals’ average balances are still well under $10,000. She predicts that, as average KiwiSaver balances continue to grow, savers will not only start to click on to the notion that they have stash of cash invested, they’ll also increasingly start thinking about how to ferret out the best providers and funds.
Boyle puts the trigger figure at around the price of second hand car, or between $15,000 to S20,000. Even with the changes in the recent Budget, he reckons it won’t take long to get there. Expect, he says, to reach that point in the next two to three years.
All of which will tap into our collective fear that, as nation, we suck at sums. It’s commonly accepted that we’re financially illiterate bunch. Yet, while it’s fair to say we’re not top of the class in the global maths department, we’re not as dumb at sums as many people think. More to the point, it seems we have some good building blocks in place to inch our way forward.
Dr Annamaria Lusardi, professor of economics from the George Washington School of Business, re-iterated this point at recent Financial Literacy Summit in Wellington when she compared our levels of financial nous with that of people in Russia, Japan, the US and bunch of countries in Europe.
New Zealand, she concluded, is model to follow for its programmes addressing financial literacy, the “unparalleled success” of our Sorted website and our surveys tracking changes in financial literacy over time.
James Beale, head of private wealth at Craigs Investment Partners, and who also attended the summit, says he finds it interesting that lot of the focus at the moment is on people’s spending behaviour and on sensible borrowing rather than saving.
“It’s the right place for the focus to be now, and we need to make sure that finance companies aren’t preying on people who are less financially literate, but at some stage in the future it would be nice to turn that round and focus on investment literacy,” he said.
“Obviously it’s important for New Zealanders to balance the books on household basis and it’s something that we haven’t done well in the recent past. We’re getting back to the position where disposable income is matching off against household expenditure now. We’ve been in big deficit position so we’re now back into neutral position, which is good.”
However much financial nous individuals may, or may not have, employers will need to play more active role in their part of the equation as KiwiSaver balances grow.
How far employers can take their role is outlined by the new post-July1 regulatory framework around finance which states that they can’t advise individuals. In any case, providing financial advice is already tricky new territory for fully-fledged financial advisers as evidenced by the number of wry comments and comprehensive disclaimers at Responsible Investment Briefing in Auckland recently.
Even so, employers tend to be first port of call for their staff on many issues. So it is reasonable to expect they’ll at least start fielding more requests from workers to help source information for informed decision-making.
Boyle predicts an employer’s role will evolve to become conduit for information. “Through their intranets, payroll or HR areas they would have access to accurate up-to-date information that they can pass on to their staff.”
Boyle sees role for providers such as OnePath in supporting employers in their discussions with staff through tools, materials and relevant updates.
Logically, too, organisations could also use higher-than-mandated employer KiwiSaver contributions as staff attraction and retention tool.
David Beattie, chief investment officer and joint CEO of Grosvenor Financial Services Group, predicts window of opportunity for companies to bring KiwiSaver, or superannuation, back as an integral part of the whole package of remuneration in the event of any possible economic upturn.
“My personal view is that compulsion of some form or another will eventually come through,” he says. “And then we’ll have model similar to Australia where it’s completely neutralised and any employer must provide contribution to the employee’s superannuation fund: no questions asked.”
Boyle points to the looming issue of portability for companies with Australasian operations. Once ratified across the Tasman later this year or early in 2012, this will enable people who transfer from either country to the other to take their superannuation or KiwiSaver dollars with them.
“From an employer’s perspective, information and support around how Aussie portability will work in the future will be very worthwhile and is something they should be looking at,” says Boyle.
He also points out that in 2012 the first wave of savers will be eligible to access their money.
“Their five years will be up. So what happens after KiwiSaver?… One of the things we’re looking at, and certainly encouraging, is that people don’t have to take their money out of KiwiSaver. We can offer them capital draw-down option to supplement or top up their savings.”
The ASB’s Catherine McGrath raises concerns about the extent to which individuals can easily understand their KiwiSaver fees.
“The fee structure originally set up around KiwiSaver reflected how fund management more generally is done: which is to more sophisticated investor. KiwiSaver is mass market product so providers needed to push even harder to make things transparent, visible and understandable for customers.
“Generally, I don’t think things are as transparent, understandable or good as they could be.”
The ASB, she notes, has changed the way it charges for KiwiSaver. “We’ve got very clear two-fee structure: an admin fee and fund m