Future murky for KiwiSaver predictions

Wednesday, 5 September 2018

It's important to understand the assumptions that are used to predict outcomes.

OPINION: Less than a third of investors across all age groups believe they have a good understanding of KiwiSaver. That's the hugely disappointing number in ASB's quarterly KiwiSaver survey released this week.

ASB senior wealth economist Chris Tennent-Brown said: 'There's work to do to help lift knowledge and understanding of KiwiSaver. This will become increasingly important as member balances grow.'

He's right. For many, KiwiSaver will be their second-largest asset on retirement (equity in the family home often being the largest). KiwiSaver totals over $50 billion and some expect it to rise as high as $200b in just over a decade - it's a major force in New Zealand and it's critical we understand it.

As we use more technology, the way we interact with our KiwiSaver changes. ASB's survey shows in the last quarter virtually no one visited their bank branch or phoned the bank to discuss their KiwiSaver (in each case no more than 3 per cent of customers). Only one in seven wanted their KiwiSaver balance posted by mail.

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Sam Stubbs, founder of Simplicity, has complained to the FMA about KiwiSaver calculators.

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Technology use is on the up, with nearly four in ten customers checking KiwiSaver on their smartphone. So KiwiSaver grows in size and accessibility, but our understanding remains low.

Pathfinder Asset Management chief executive John Berry: 'KiwiSaver providers give confusing or even contradictory messages.'

It doesn't help when KiwiSaver providers give confusing or even contradictory messages. One provider, Simplicity, has complained to the Financial Markets Authority (FMA) that online calculators from KiwiSaver providers come up with very different results. Some KiwiSaver providers say the amount you may have at retirement could be more than twice the size of another provider's estimate.

These are forecasts, so of course there's no single right answer, however when investors are planning for retirement they may be given false hope – or just left completely confused - by what different providers tell them.

It's critical to understand assumptions used in forecasts. Providers have been quick to respond to Simplicity by saying that they disclose all assumptions. Yet, based on a check of the retirement calculators from 10 KiwiSaver providers, half use smaller type size for the assumptions and half make their explanations too long or complex. Alarmingly, one provider uses text so small it's almost unreadable.

To calculate your expected KiwiSaver pot of gold at retirement you'll need to set assumptions like how you save (how much and how often), economic impacts on your savings (tax charged and inflation rates) and investment impacts (long-run investment return assumptions and fund manager fees).

Common differences between KiwiSaver calculators include assumptions for inflation, salary increases and investment returns. Two providers completely ignore inflation, which is misleading – the purchasing power of $100 now is much higher than the purchasing power of $100 at a future retirement date, there's no point trying to pretend they're the same value.

KiwiSaver providers generally use a 2 per cent inflation assumption, which is the middle of the Reserve Bank's target range. That's reasonable provided politicians don't change inflation targets, as New Zealand's long-term inflation over the last century is twice as high.

KiwiSaver providers have huge variations around future investment return assumptions. One provider assumes that global equity returns after inflation will exceed 8 per cent per annum until retirement. That seems excessive when compared to global stock market returns (after inflation) of only 2.2 per cent per annum since 1990. Unrealistic assumptions risk KiwiSaver retirement balance forecasts being grossly overstated.

The FMA should respond by forcing KiwiSaver providers to use consistent and independently set inflation and investment return assumptions. KiwiSaver investors need confidence that retirement calculators are reliable and fair – at the moment some look more like fund managers' shonky marketing tools.

John Berry is co-founder and chief executive of Pathfinder Asset Management, a specialist responsible investment fund manager. Pathfinder does not currently offer a KiwiSaver scheme.