A just-released in-depth analysis of almost 500,000 KiwiSaver accounts has confirmed personalised advice remains out of reach for the majority of members at, or close to, retirement age.
The Retirement Income Interest Group (RIIG) – a sub-committee of the NZ Society of Actuaries – study found that the overall “modest” account balances of members aged 45-up implies individual advice “will not be cost-efficient for most KiwiSaver members currently at an age to be thinking about drawdown”.
“Most retirees will rely on generalised guidance, which should be simple, readily available and consistent across multiple sources,” the RIIG paper says. “Regulation should get ahead of this demand.”
The Financial Markets Authority (FMA) is currently considering how KiwiSaver schemes can deliver advice (across all age groups) without the use of blanket in-built product commissions. In its value-for-money plans released this May, the FMA expressed a strong preference for targeted KiwiSaver fees charged explicitly to members who receive advice – or, at the very least, for advisers to provide regular proof they are providing appropriate services to members for any commission payments.
Paul Gregory, FMA investment management director, said at the time: “The FMA, Supervisors and fund managers agree investors benefit from financial advice. The FMA and Supervisors want a discussion with industry on how investors get the help they need to make good decisions, how an offering delivering that help could be structured to represent value for money and disclosed to members, and how the FMA can assist.”
However, the RIIG study, which analysed real account data of more than 473,000 KiwiSaver members aged over 45, suggests most of the current cohorts of retirement-age investors would be better-served with standardised off-the-shelf investment guidance on subjects such as asset allocation.
For example, the actuarial analysis “supports the case for information on drawdown options given to new retirees to include more explanation of the benefits and risks of keeping KiwiSaver invested in higher levels of growth assets than this data shows for the current 65-84 group”.
The first-of-its-scale study of real KiwiSaver account data also revealed new insights into the distribution of savings across age groups and gender.
Overall, the RIIG data-sweep found the KiwiSaver market is composed of a tight cluster of small balances “and a ‘tail’ of large balances”: about 0.015 per cent of the sample, or just over 7,000 members, held $1 million or more in their accounts.
“This means the average balance figure is not helpful information,” the report says. “For the majority of those currently close to retirement KiwiSaver will provide a modest supplement to other income, with the median balance for 60–64-year-olds being $38,000 for men and $31,400 for women.”
RIIG concludes the substantially lower balances of female KiwiSaver members – a bias that eases a little in the post-65 age cohort – reflects wider social issues (pay levels, time spent working) rather than any regime design issues.
As well, the study found a link between conservative asset allocation and lower account balances – a correlation that skewed women’s KiwiSaver portfolios to low-risk assets.
“… both men and women tend to be invested in lower risk/lower return funds if they have small balances and invest more in growth assets if they have larger balances,” the report says. “From age 60 both men and women become increasingly likely to be in lower risk/return funds, especially women. Only among the over-65s do women clearly appear more conservative investors than men.”
Despite acknowledging the relative youth of KiwiSaver (15 this year) and possibly unrepresentative sample, the RIIG study says the findings “are likely to hold more widely for current age 45+ cohorts”.
“… the results may not hold for the whole market, or for future cohorts,” the report says. “… However, it is logical to suppose that in the absence of KiwiSaver members changing their contribution levels from now until they reach age 65, the current situation will roll forward at the level of investment returns achieved. The compounding of investment returns over the period will widen differences in the size of balances.”
RIIG says ongoing studies of KiwiSaver account data would prove invaluable in tracking member behaviour over time and developing more effective policies.
“We suggest that the FMA and Retirement Commissioner consider how to trial this with a view to whole-of-market data collection and analysis on a regular basis,” the report says.
The specialist actuarial group includes Ian Perera as convenor along with Alison O’Connell, Christine Ormrod, Fraser McKay, Kelvin Prisk, and Simon Ferry. Previous RIIG convenor, Daniel Musset also contributed to the latest report.