Response to the Review of KiwiSaver Default Provider Arrangements

Transcription

1 Response to the Review of KiwiSaver Default Provider Arrangements Introduction My name is Austin Fisher. I am an Authorised Financial Adviser (FSP110047) and soon I will be setting up a company that offers truly independent KiwiSaver advice to the public. I am making a submission because I think I have a good perspective to offer. In my work, I have met many people who fit the automatic enroller category of membership. These are not people that a provider normally gets to see. My working experience has specialised in workplace superannuation before and after the introduction of KiwiSaver. I have been fortunate to have been employed by highly successful providers, promoting superannuation and KiwiSaver to the public, usually at their workplace. I would estimate that I have presented to over 200 different workplaces in NZ over the last 10 years about KiwiSaver and superannuation. I moved to New Zealand in 1999 after having worked as an Independent Financial Adviser in the UK. In New Zealand, I worked for Watson Wyatt (now Mercer) before moving to Aventine/Superlife for a short time. After that, I moved to AMP ( ) and then ASB ( ). The AMP and ASB positions were relatively senior in the superannuation arena. The views expressed here are my own and nothing to do with my previous employers. The Discussion Document The Discussion Document is comprehensive and covers the issues very well. I am grateful to be given this opportunity to respond. 1

2 The Mysterious World of the Automatic Enroller Many things are discussed in the document, yet the central issue is whether automatically enrolled members of KiwiSaver should have their investments allocated into areas that are deemed to be appropriate for them, based on their age. This is generally referred to as LifeStages, so I will use that term too. A member who joins KiwiSaver automatically through the workplace is the most enigmatic and mysterious of all superannuation members. The provider knows very little about them, other than a few essential details. Getting to know them (if we can) The majority of KiwiSaver members have actively joined by filling in a form themselves. Automatic enrollers are different - and understanding these members (or at least trying to) is important. To be clear, I am only covering the automatic enrollers in this document. What do we know about them? We know that they are adults and they are employees - and that they will be paying contributions through their workplace s payroll. These members demonstrate that it is possible to utilise KiwiSaver without engaging with a provider. Many members who join this way will not engage with KiwiSaver or their provider until later on in their working lives. Some may never do. When they get to NZ Superannuation eligibility age, they should be pleasantly surprised to find money waiting for them. While it is true that under NZ legislation these members have consented to KiwiSaver membership by their inactivity I think it is drawing a long bow to interpret this as tacit permission to allow a provider to invest their money in higher risk areas. Some Automatic enrollers may not ever want to engage with their provider. An active member has made a decision to place a certain amount of trust in their provider. An automatic enroller has not done this. 2

3 Many members seemingly have no interest in what happens to their KiwiSaver money which is of course heart-breaking to some of us. In this paper, I will discuss why I think LifeStages as a default setting for automatic enrollers is a step too far. A rugby analogy always helps I once met someone who had bet his household savings on the outcome of an international rugby series - without telling his wife. Happily for him (and his marriage) he made the right call. He expressed relief because one of the matches was, unexpectedly, very close. Despite the happy outcome, his wife was appalled that he had taken such a risk without telling her. However, he maintained that he was an expert in his field and made a correct call based on his expert knowledge. In a sense, the LifeStages proposal resembles this man s behaviour. Where the situation differs is that the man was using his own household s money. Also, his wife made a legal declaration that she and him are together for life. So if she married an idiot, she must take on board some responsibility for letting him loose with their money. So who is taking the risk with LifeStages? Moving automatic enrollers to LifeStages involves more risk being borne by the member. I reiterate that this is totally fine for a member choosing to make an active choice to join a LifeStages programme. The act of switching conservative funds into growth funds increases the annual fund management fees immediately in direct comparison to the present conservative funds. In return for this immediate increased revenue for providers, the members balance will probably grow more over time. My view is that the KiwiSaver providers who are keen to encourage members into growth funds should take the initiative to actively convince members. They do this by using their own resources and expertise to state a compelling case. This proposal seems to rely on a Government-sanctioned system to help do that work for them. 3

4 The Government also takes on risk as they become supporters of a LifeStages programme. If the outcomes disappoint, they will share in the responsibility for introducing it on behalf of those that automatically enrol. Does a future Government want that conversation with the public during hard times? Act as if someone s always looking (even if you know they aren t) As an industry, we are judged by how we treat our most vulnerable. Yes - some automatic enrollers probably do need more education, information, guidance and reassurance. Yet my belief is that their lack of engagement increases our duty of care and the need to protect their retirement savings, keeping it safe for them. A suggestion to balance the risk If we must travel down the LifeStages road for automatic enrollers - my view is that the Government should require the providers to promise to pay the member, as a minimum, the balance that they would have achieved in a conservative fund. That way, the provider participates in the risk alongside the member. Is LifeStages good for all of the people, all of the time? The notion that people should adjust their KiwiSaver portfolios as they get older may be sensible, most of the time. The drawback is that there will always be exceptions. LifeStages may prove to be disastrous to some individuals. The Discussion Paper wrestles with individual dilemmas that confront a broadly sensible theoretical device like LifeStages. As we have established, providers know very little about the automatic enroller members. They cannot possibly know whether these members have plans to buy their first home, have a serious illness, low life expectancy, or will never understand what investment risk is. 4

5 With LifeStages, providers and Governments will be making investment assumptions based purely on age. Advocates for this will have to be found, be available, and be able to successfully articulate the benefits to the public frequently. Will the providers have people available to do that in the future? No turning back Under the present system, someone may regret not having taking more of a risk and perhaps making more money. This puts them in the company of everyone that has ever invested money in anything, ever. Unless the provider promises a minimum return (as discussed on page 4), there is no turning back with LifeStages the automatic enroller may end up with less than he paid in and then look for those responsible for explanations at that point. Is introducing LifeStages straightforward? LifeStages, if introduced, will be different between provider X and Y. Each provider will believe that their formula is the best. The Government will probably have to establish some new parameters across all providers so that interpretations are not too lax, depending on the fund manager s world view. How will Government decide this? Who would do that work? Yesterday s gone The LifeStages approach promises a likely theoretical future benefit based on future projections based on what happened in the past. Yet all investors are looking to make money in the future. Even in my 30 years, I have seen slam-dunk, reasonable-at-the-time future growth assumptions become meaningless over time because unexpected things happened and times changed. 5

6 (Meaningful) charts would be a fine thing Tables illustrating relative sector performances from decades ago are interesting, particularly to institutional investors on behalf of large funds with a long time horizons (e.g. the NZ Superannuation Fund or the larger workplace schemes). However, the implied message these charts give people ( invest in shares over the long term and you can t go wrong! ) serves to mislead when used as a sales aid to an individual. There is an example in the Discussion Document s Appendix Two where a Credit Suisse chart is used to illustrate how well equities have performed relative to other sectors since Typically, charts like these will track one lump sum invested x years ago. Equities/shares as a sector always come out on top yet there are important facts relevant to the individual investor that such charts cannot show: 1. All sector performances are shown as tax neutral. It is too hard to quantify over previous decades the tax treatment to the individual over the various sectors. Ignoring the tax side gives an illusion of level-playing-field fairness. Taxation is too important to simply put to one side. Those investing directly in property over the long term have done very well and the favourable taxation treatment for those investors has been a huge reason why. 2. Automatically enrolling KiwiSaver members do not pay in one lump sum right at the beginning. The fact that they contribute regularly is very important indeed. 3. The longer the period that the chart covers, the smoother the volatility appears to be. Because some charts cover over 100 years, even the 1920s and 1970s are shown as relatively placid, docile times on the chart. 4. Such charts do not contemplate the vehicle used by people to achieve those returns. Managed fund products come and go. As recently as 1 October 2007, when the PIE tax regime came into force, the previous managed fund products became outdated. So new managed funds products came in and existing products were either wound up or converted. 6

7 Perspective from the workplace As mentioned in the introduction, my job has involved meeting people at their workplaces. The feedback from these groups is often less-than-glowing about the track record of the financial services industry. Apart from those who are members of good workplace superannuation schemes, I struggle to call to mind many people that have talked fondly of an individual managed fund savings product they first invested in more than 20 years ago. In fact, my experience is the direct opposite. Individual managed fund investment products from more than 20 years ago tended to have some form of life insurance attached. Once the life insurance premiums are paid for (not to mention the upfront commission), the resulting investment return to the public has generally been poor. The salesperson from ABC Provider Limited promised huge returns in the 1970s. That didn t happen. That salesperson has long gone, but ABC Provider Limited is still there and doing well. ABC Provider Limited in 2012 will distance themselves from what ABC Provider Limited did or said in 1970 yet the public sees the same entity, unchanged, seemingly reneging on promises. Due to this and the (unrelated) finance company events, the financial services industry needs to continue to work hard to regain trust from large sections of the public. To put it another way, ABC Provider Limited s recommendation for the way forward does not enjoy unconditional acceptance, no matter how wellintentioned or sincere those recommendations may be from the class of Conversely, KiwiSaver itself seems to be popular, particularly as people are now collecting on their savings. By association, KiwiSaver is getting the financial services industry back into the public s good books. I strongly believe that the financial service industry s themes must return to sound management, simplicity, low fees and a feeling of transparency, safety and reliability. Learning from the recent past In the late 1980s and throughout the 1990s, it was seen as reasonable to project annual investment growth rates of more than 10% a year. We now know that was wrong. 7

8 Overstating growth projections misled the public into thinking that they will retire with a handsome benefit, using compounding interest as a theme. When that didn t happen, suspicion and disillusionment set in. We have to take on board that current conditions may not continue in the future. Hopefully, funds will grow at higher levels than projected but no-one can say with certainty what the future returns will be. As an Adviser, I am very clear on not relying on past performance to base one s investment decisions for the future. Yet LifeStages seems to base its very credibility on the performance of asset sectors in the past. KiwiSaver resilience KiwiSaver s present structure stood up to the Global Financial Crisis. Would KiwiSaver have enjoyed its continuing success if its early returns were wiped out by the negative stock market movements of 2008/2009? I think LifeStages, had it been in place in 2007, would have mortally wounded KiwiSaver. Younger automatic enrollers would have seen their balances go down. What played out was that those who had negative returns did so in the knowledge that growth assets are volatile. It s exactly what they signed up for, so it was less of a surprise. The automatic enrollers saw conservative returns and liked that aspect. I am very surprised that the very aspect of KiwiSaver that saved its bacon is being challenged now that we have had a couple of years of better returns. Simplify, simplify Kiwisaver needs to be as simple as possible. There are already complexities that cause people to pause for thought and keep their distance. LifeStages introduces more complexity, more cost, and makes KiwiSaver more difficult to explain and understand. 8

9 Let s back ourselves Some of the argument to apply LifeStages to KiwiSaver is prompted by activity in Australia and the UK s recent NEST initiative. NEST has had a very long gestation and is very complex. Yet it was inspired in part by the proven success of KiwiSaver. Australia is a world-leader in employer superannuation, yet many Australians now have multiple funds across multiple providers as they change jobs. Employers need to pay contributions through their payroll to multiple providers too. KiwiSaver s operational elegance and efficiency removes that problem. NZ employers merely have to deduct one amount through PAYE and send it to the IRD. Worth noting as well that management fees in Australian super funds are far higher than those charged by the default providers in NZ. KiwiSaver s innovative features are ground-breaking and its success was not inspired by emulating existing models adopted by other nations. The number of default providers My view is that the six default providers have worked efficiently alongside IRD. However, there has been a clear seven-year advantage to being a default provider in terms of membership numbers. This must be hard to take for the providers that missed the cut in 2006, many of which provide perfectly good KiwiSaver schemes. My view is that every provider should be able to offer a low-fee, conservatively invested default fund and should be able to voluntarily participate equally in the automatic enrolment process with IRD. Boutique/specialist providers may even choose not to participate. This will level the field across more providers and give them a chance to compete more fairly. I do not see a reason for a fixed panel of default providers to be set in stone for seven years. There is an increased level of comfort attached to default schemes because they have the Government s effective seal of approval. Allocating this level of confidence to all schemes (as long as they meet the criteria) will promote more widespread confidence in KiwiSaver. 9

10 Fees I believe that the fund management fees charged by the default funds are already at a reasonably low level. A small fixed $ administration fee and a % management fee related to funds under management is fine, as long as no other costs are hidden in the unit pricing. I do not agree with zero fees for negative returns. For many funds, negative periods should be expected and even welcomed because it increases the likelihood of future growth. One consolidated fixed fee disadvantages those with low balances. I think most people understand the fairness of a reasonable fixed fee to pay for the administration and a % fee related to how much money they have invested. Other fees (trustee fees, performance fees, contribution fees, adviser fees) should be done away with. Conservative default funds are unlikely to return negatively, but if they do, that will probably be down to global economic events rather than the fund manager s lack of expertise. Does the Government want to be a provider? I see no merit in having one default provider. At present, the Government is not a KiwiSaver provider and becoming one, as per the recommendations set out by the Savings Working Group, introduces a whole new world of compliance, risk and costs that are simply not necessary when the present providers are already doing that job adequately. KiwiSaver carries with it no guarantees. Any quasi-government provider will inevitably be seen as the "safest" provider. Politically, members will expect the Government to underwrite such a fund, no matter what the wording is over that aspect. The Government s present role is, literally, one of governance. Improvements can be made to KiwiSaver by future Governments without having conflict of interest issues. 10

11 Compulsory membership of KiwiSaver If soft compulsion is introduced in the 2014/15 year, it is likely that the default providers in place will instantly gather in over one million employees that currently sit outside of KiwiSaver. This is why getting this right is so important. Decumulation At present, KiwiSaver members can take their money as a lump sum when they become eligible. Alternatively, they can draw down some of that money and leave the rest invested. My feeling is that the call for decumulation products or a refreshed annuities market is coming from the financial services sector rather than the public. In other nations, the drawing down of retirement savings is restricted because of the tax exempt nature of the contributions and/or the investment growth. KiwiSaver has no remaining tax relief on contributions or investment growth, so to legislate restrictions on drawdown is less appropriate here in New Zealand. Who would benefit the most from LifeStages? Like with decumulation, the call for LifeStages is mainly coming from some areas of the financial services industry. My perception is that the public satisfaction level with KiwiSaver as a programme is high. This is because automatic enrollers have seen their account balances accumulate. LifeStages introduces an element of volatility and complexity. I am pleased that the current risk profile for automatic entrants is set conservatively because the emphasis should be on protecting these particular members funds under management until they themselves are ready to move their money and they give permission to do so. 11

12 Summary of recommendations 1. LifeStages should not be a default setting for automatic enrollers because those members haven t given their permission to take investment risk. 2. Lack of member engagement increases the need to protect the retirement savings and keep them safe. 3. Unfortunately, the financial services industry does not (yet) enjoy high levels of unconditional acceptance for new initiatives. 4. LifeStages is OK for people who actively choose it and the provider should make a compelling case to the individual. 5. If LifeStages must be introduced, the provider should share in the risk borne by the member. 6. LifeStages makes KiwiSaver more complex and expensive. 7. Past performance data really isn t a guide to future fund performance. 8. All KiwiSaver providers should be allowed to offer a default fund and join the automatic enrolment process, if they choose to, as long as they meet set criteria. 9. The Government should not be a KiwiSaver provider. 10. Current fee levels across default funds are reasonable. Austin Fisher 5 December 2012 austinfisher@xtra.co.nz 12