Monday 5 September 2016
Why I agreed to become a trustee for Simplicity KiwiSaver?
(Peter Neilson will be a Trustee of the Simplicity Charitable Trust. He is a former finance minister and former CEO of the Financial Services Council. The views expressed are his own and do not constitute financial advice}
How will Simplicity make a difference?
By paying the lower Simplicity fees, over 45 years of saving in your KiwiSaver account, you will end up with $65,000 more in your retirement nest egg compared with paying the current average KiwiSaver fees. This example is for someone on the median full time income of $47,000, (contributing 6% between themselves and their employer) in a balanced fund. This example understates the potential benefits which will be much bigger if you;
are contributing at a higher level,
are on higher salary or
are in a growth fund,
In reality, many people will be drawing down steadily from their KiwiSaver account throughout their retirement rather than withdrawing it all at retirement so the benefits of lower fees can carry on well past your retirement date possibly for a further 30 years.
Most KiwiSavers are currently paying relatively high fees. On average current KiwSavers are paying about 1.3% of the balance, they have invested in their KiwiSaver account, in total fees each year. (Numbers supplied by Actuaries Melville Jessup Weaver.) It is a little higher, 1.48% for growth funds, which have more shares in their portfolios, and a little lower, 1.17% for conservative funds, which are, more weighted with bonds and cash.
Most New Zealanders don not know they will individually spend more on their KiwiSaver fees over their life than they spend on either power or their cell phone. Fees over time make a big difference to what you will receive in your retirement nest egg.
The following example highlights the impact of inflation, fees and tax on KiwiSaver investment returns. Suppose your KiwiSaver investments earn 6% before inflation, tax and fees and you are in the 33% income tax bracket so you pay 28% in tax on income earned within your KiwiSaver fund.
Earnings before inflation, tax and fees 6%
Less Inflation of say 1%
Less Tax of (28% x 6%) =1.68%
Less Fees of 1.3%
Your original 6% investment return net of inflation, tax and fees is just 2.02%
In this example after inflation, tax and fees the KiwiSaver ends up with only about one third of the original 6% return. This is just the impact over just one year of investing.
Fees matter even more over the longer term as they mean less of your interest, can be reinvested, into your KiwiSaver account to earn compound returns (interest on interest). Not all KiwiSaver providers give you an annual statement that totals up all the fees you are paying each year in one simple statement. That needs to change.
What is Different about Simplicity KiwiSaver?
Simplicity is a KiwiSaver provider, which combine several new features that are available overseas but are only now to be available all together in one New Zealand KiwiSaver plan.
The fund will invest passively, buying index linked investments that, over time, have been shown to outperform most, but not all active fund managers on a net returns basis, after paying fees.
For its international investments, Simplicity will utilise the massive scale of Vanguard, the world’s second largest fund manager, investing in their passive funds to minimise costs and fees.
Simplicity has asked the not-for-profit Vanguard to establish passive funds that fully comply with New Zealand’s laws on unethical investments.
As the investments whether in the conservative, balanced or funds are all passively managed the fees for each Simplicity account will be the same low level, a management fee $30 a year plus .30% on the assets in your account for a total fee of 0.59% compared with the current KiwiSaver industry average of 1.35%.
The impact of any adverse currency movements on the international investments in terms of New Zealand dollars, will be insured against by Simplicity “hedging”.
Simplicity will be a” virtual” business outsourcing most of its activities and employing a small number of staff to monitor suppliers and operate the on-line services for members. This avoids the costs of having branches and makes the business able to easily scale up for any level of demand.
Simplicity will also contribute 15% of its management fees each year to charity initially with an emphasis on financial capability education and financial literacy activities
Being a not for profit business, owned by a charity means any cost savings, after recovering the establishment costs and making its charitable grants will be returned to its members in continually lowering fees.
Who are the people behind Simplicity?
When I look at a business plan, I always ask two questions.
Can the business be successful as planned? I know this business model can work here just as it already has, in other countries.
The next question is can the people involved deliver the business plan as outlined.
Sam Stubbs who is funding the project, out of his own pocket is a former CEO of the Tower Investments that managed the Tower KiwiSaver funds, before they were on sold, to Fisher Funds.
He and Mark Fitzgerald who managed the Westpac KiwiSaver Schemes are two of the directors of Simplicity that I have previously worked with. They were both on the Board of the Financial Services Council when I was the CEO. They both know the financial services sector needs to change to deliver more value for its customers. Another Director is Kirsty Campbell who is a former Head of Supervision at the FMA, the Industry Regulator.
I believe these people can deliver the Simplicity business plan. I have agreed to become a trustee to make sure that the promises made to Simplicity members are delivered.
How will the entry Simplicity change the financial services industry?
Initially Simplicity will shake up the KiwiSaver industry by giving the well informed “smart money” a new, better, lower cost option for their KiwiSaver investments.
Tech savvy and in particular younger New Zealanders will also get it that Simplicity means a lower cost option you can easily transfer to and manage from your smart phone. Having used the online calculator they will see how they can save their first home deposit much faster with lower fees and also, end up with a bigger balance at retirement.
By word of mouth recommendations and social media referrals, the default KiwiSavers currently mainly with banks will start to move, if the fees, are not cut by their current provider. Default KiwiSavers will discover first that they are paying much higher fees than they could be with Simplicity and secondly that their current KiwiSaver provider may not have advised them to invest in the most appropriate investment style to help achieve a comfortable retirement.
Simplicity will have another major benefit for the industry in helping to make a professional and genuinely independent, financial adviser businesses, feasible. Currently many financial advisers are effectively tied, to one source for their products. They are mainly salespeople rather than professional financial advisers. The advice provided up front is “free” but the costs of advice are hidden in a much higher, longer term costs for the products. Simplicity will not be paying commissions to advisers but by providing the lowest cost KiwiSaver products in the market, a truly independent professional financial adviser can recommend them and meet their obligation to put the customers interest first without conflict. With a range of low cost competitive products available it would be possible for a genuinely independent professional financial adviser to adopt a fee for service model charging the customer directly for their advice without any potential conflicts created by sales commissions and incentives.
The impact of low fee Vanguard funds becoming available in the UK saw fees dropping from previous levels and more options for investors, made available.
If this plays out in New Zealand KiwiSavers will collectively benefit from savings worth billions of dollars over the years they are saving. As a result, many more New Zealanders invested in KiwiSaver will be able to purchase a first home faster and retire in comfort. That is a difference worth making.
My Trustee Role with Simplicity
I have agreed to become a Trustee for Simplicity the new, low fee, not for profit KiwiSaver provider.
I am also putting my money where my mouth is by transferring the $150,000 in my current KiwiSaver account into the Simplicity growth fund. The role of trustee is a not paid but is important, The trustees represent the beneficiaries, the Simplicity KiwiSavers and are the “owners” of the business who will decide who will get grants from the Simplicity charitable trust. This is a structure similar to health insurer Southern Cross and the model l used when I reformed the Trustee Savings Banks as a finance minister back in the 1980’s. The boards of the old trustee savings banks combined the very different roles, the commercial role of managing a bank with the role of both being an “owner” on behalf of the customers and a charity distributing some of the bank’s profits in grants for community projects. After splitting those two roles, the trustee savings banks were able to improve both their commercial and charitable performance.
In 1916 Robert Frost the great American poet published the poem “The Road Not Taken”
The best remembered lines from that poem read,”Two roads diverged in a wood, and I took the one less traveled by, And that has made all the difference”. Being involved in KiwiSaver is the road less travelled but I am sure it will make all the difference for young New Zealand KiwiSavers. Late last year my son and his fiancé purchased their first home in Auckland having both been KiwiSavers and having saved sufficient to earn the linked home purchase grants. My daughter is also saving for her future in KiwiSaver. That is why I am backing Simplicity. It will make a big difference for younger New Zealanders and it is also, the right thing to do.
Contact Peter Neilson 021 395 891 firstname.lastname@example.org