Low-cost guarantees will protect KiwiSavers from downturns
Embargoed until 6am, Monday 21 July 2014
Low-cost guarantees will protect KiwiSavers from economic downturns – and help deliver huge retirement nest egg rises
New research undertaken by Infometrics for the Financial Services Council (FSC) has shown capital guarantees on KiwiSaver balances are a much better deal for KiwiSavers than defaulting them into conservative funds as is the current policy.
FSC CEO Peter Neilson says for guarantees costing $2,799 a balanced fund investor would be $170,000 better off. For guarantees costing $3,465 a growth investor would be $220,000 better off at retirement compared with staying in the current default conservative fund.
“Rather than paying the cost as a one off fee it is probably better to charge a modest increase in your KiwiSaver contribution rate,” Mr Neilson says.
“We asked Infometrics to calculate the cost of guarantees that would ensure someone who was defaulted into a balanced or growth fund was protected against a major financial market downturn, specially when close to either retiring or withdrawing funds to buy their first home. If a KiwiSaver were to retire or put a deposit on a first home in a year of a downturn in capital markets they could find their savings had declined if they were in a balanced or growth fund.
“Understandably many KiwiSavers don’t want to find they need to access their funds in a year like 1987 or 2008 when the markets fell sharply.”
While conservative funds avoid much of this risk they do so at a very substantial cost, Mr Neilson says.
By age 65, someone on the average wage saving for 40 years at a 7.6% contribution rate in a balanced fund rather than a conservative one ends up with $170,000 more.
At age 65 after 40 years someone on the average wage saving for 40 years at a 6.1% contribution rate in a growth rather than a conservative one the gain is even greater - more than $220,000, the Infometrics study finds.
While the average earning rate is higher in a balanced or growth fund the earnings are more variable year by year. A conservative fund can expect to earn an average 4% each year after fees and tax whereas a balanced fund would earn 6% and a growth fund 6.6%.
When the default arrangements for KiwiSaver were reviewed last year the Government decided to stick with the current default into conservative KiwiSaver funds for those who don’t exercise their option to choose a higher earning/higher risk balanced or growth fund.
At that time the FSC and others suggested that for younger KiwiSavers a default into a balanced or growth fund made more sense while keeping the option to move elsewhere later.
Commentary around that time included concerns that those close to purchasing a first home or close to retirement would not want to find that coincided with a very bad year for financial markets.
Mr Neilson says: “This new research shows guarantees for KiwiSaver paid for by the KiwiSaver and backed by the Crown Balance Sheet appear to deliver significant benefits for KiwiSavers at minimal cost. When polled last year for the FSC by Horizon Research most KiwiSavers said that if they were in a conservative fund they would want to move to a balanced or growth fund if capital guarantees were in place.
“Most New Zealanders think it’s a ‘no brainer’ for the Government to make this the standard default option.”
FSC is asking all political parties to consider changing the default option for KiwiSaver so that younger New Zealanders default into balanced or growth funds with appropriate guarantees paid for by the KiwiSaver. They will pay relatively little to buy a guarantee – and end up far better off when they retire. It’s important we have some long term thinking to reap the maximum protection and benefit for the younger generation who work and save for a lifetime.”