KiwiSaver Insight -
Mirror, mirror on the wall,
who has the best lifecycle of them all?
Most advisers know that around 90% of the variation in a KiwiSaver member’s returns are due to asset allocation and that younger investors should have a greater exposure to growth assets than older investors. They also know that KiwiSaver is a scale game, as member balances are too low to adequately compensate financial advisers for providing much more than a cursory financial overview.
It is therefore logical that the legislation is supportive of lower cost robo alternatives and that the Ministry of Business, Innovation and Employment (MBIE) and the Treasury have announced they will be considering making the default option a life-stages approach.
NZ Funds recently commissioned independent experts MyFiduciary to review the life-stages options available in New Zealand. Here are some selected insights from their report.
Life-stages managers
Nine out of 22 managers offer a life-stages option. Of these, four managers – AMP, ANZ, Generate and Lifestages – change allocations infrequently and by a large amount. The other managers – NZ Funds, AON Russell, Fisher Funds and SuperLife – have smoother adjustment paths.
Rebalancing profiles
Leaving a member’s allocation to growth assets unchanged for five to ten years, then dropping their weight substantially overnight, can be a major problem if the rebalancing date coincides with a bad period for equity markets. A smoother glidepath with, for example, annual rebalancing reduces the chance of de-risking at a bad time.
Allocations to growth
All managers use their standard funds (growth, balanced, conservative, etc) as the building blocks for their life-stages option. The approach is to alter the underlying fund or weights to two or more funds to achieve the target glidepath.
A common theme from academic research into optimal life-stages strategies, and from reviews of actual products in the market, is that current life-stages options are too conservative, with investors being better off if their portfolios did not become less aggressive until much later in their lives.
The glidepaths of managers in New Zealand tend to be very conservative. At age 65 the average allocation (excluding NZ Funds) is 26% growth / 74% fixed income. In contrast, NZ Funds starts the de-risking process at age 55 from a higher growth allocation. Clients have more than half their portfolio in growth assets until they are in their mid-80s.
Expected outcomes
MyFiduciary modelled a person who starts saving at age 25, has an income of $75,000 that grows through time, and saves 4% of their income (plus a 3% employer contribution) in a life-stages strategy across different managers.
The average of all balances at 65 years of age was $426,000. Savers who choose NZ Funds, Fisher Funds or SuperLife achieved a higher level of expected wealth at retirement after fees. For example, a saver who invests in the NZ Funds’ LifeCycle strategy would expect to have $459,000 at age 65 (adjusted for inflation, i.e. measured in today’s dollars). In contrast, savers who selected AMP Lifesteps, AON Russell or Generate Stepping Stones had less expected wealth at retirement of between $395,000 and $399,000 - approximately $64,000 or 14% less.
The MBIE and Treasury Discussion Paper notes that if the Government chooses a life-stages option as the default option, the Government would set the investment mandate of each stage and the ages at which each stage would apply. They also note that a conservative final stage would be too conservative for those approaching retirement, given average life expectancy is much higher than the retirement age.
Advisers need not wait for the Government to make a decision. Life-stages options which have high expected retirement value are already available in the market.
It is therefore logical that the legislation is supportive of lower cost robo alternatives and that the Ministry of Business, Innovation and Employment (MBIE) and the Treasury have announced they will be considering making the default option a life-stages approach.
NZ Funds recently commissioned independent experts MyFiduciary to review the life-stages options available in New Zealand. Here are some selected insights from their report.
Life-stages managers
Nine out of 22 managers offer a life-stages option. Of these, four managers – AMP, ANZ, Generate and Lifestages – change allocations infrequently and by a large amount. The other managers – NZ Funds, AON Russell, Fisher Funds and SuperLife – have smoother adjustment paths.
Rebalancing profiles
Leaving a member’s allocation to growth assets unchanged for five to ten years, then dropping their weight substantially overnight, can be a major problem if the rebalancing date coincides with a bad period for equity markets. A smoother glidepath with, for example, annual rebalancing reduces the chance of de-risking at a bad time.
Allocations to growth
All managers use their standard funds (growth, balanced, conservative, etc) as the building blocks for their life-stages option. The approach is to alter the underlying fund or weights to two or more funds to achieve the target glidepath.
A common theme from academic research into optimal life-stages strategies, and from reviews of actual products in the market, is that current life-stages options are too conservative, with investors being better off if their portfolios did not become less aggressive until much later in their lives.
The glidepaths of managers in New Zealand tend to be very conservative. At age 65 the average allocation (excluding NZ Funds) is 26% growth / 74% fixed income. In contrast, NZ Funds starts the de-risking process at age 55 from a higher growth allocation. Clients have more than half their portfolio in growth assets until they are in their mid-80s.
Expected outcomes
MyFiduciary modelled a person who starts saving at age 25, has an income of $75,000 that grows through time, and saves 4% of their income (plus a 3% employer contribution) in a life-stages strategy across different managers.
The average of all balances at 65 years of age was $426,000. Savers who choose NZ Funds, Fisher Funds or SuperLife achieved a higher level of expected wealth at retirement after fees. For example, a saver who invests in the NZ Funds’ LifeCycle strategy would expect to have $459,000 at age 65 (adjusted for inflation, i.e. measured in today’s dollars). In contrast, savers who selected AMP Lifesteps, AON Russell or Generate Stepping Stones had less expected wealth at retirement of between $395,000 and $399,000 - approximately $64,000 or 14% less.
The MBIE and Treasury Discussion Paper notes that if the Government chooses a life-stages option as the default option, the Government would set the investment mandate of each stage and the ages at which each stage would apply. They also note that a conservative final stage would be too conservative for those approaching retirement, given average life expectancy is much higher than the retirement age.
Advisers need not wait for the Government to make a decision. Life-stages options which have high expected retirement value are already available in the market.
Retail KiwiSaver Schemes - LifeCycle.
Analysis by MyFiduciary.
Analysis by MyFiduciary.
1. Post retirement is the average from age 65 to 80. .
2. Terminal wealth is measured in today’s dollars, i.e. adjusted for inflation. Based on a Monte Carlo simulation for a person who starts saving at age 25 with a starting salary of $75,000. Based on 4% contribution rate plus 3% employer contributions. The terminal wealth evaluation includes each scheme's estimated fund charges including performance fee and administration charges. .
3. Average amount at age 70 assumes the client stops making contributions at age 65 but does not draw down on their capital until age 70. For more information contact NZ Funds
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest PDS for the Scheme is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.
2. Terminal wealth is measured in today’s dollars, i.e. adjusted for inflation. Based on a Monte Carlo simulation for a person who starts saving at age 25 with a starting salary of $75,000. Based on 4% contribution rate plus 3% employer contributions. The terminal wealth evaluation includes each scheme's estimated fund charges including performance fee and administration charges. .
3. Average amount at age 70 assumes the client stops making contributions at age 65 but does not draw down on their capital until age 70. For more information contact NZ Funds
New Zealand Funds Management is the issuer of the NZ Funds KiwiSaver Scheme. A copy of the latest PDS for the Scheme is available on request or by visiting the NZ Funds website at www.nzfunds.co.nz.
Michael Lang is Chief Executive of New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. Michael’s comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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