OPINION: With over $60 billion invested in KiwiSaver it’s becoming significant for a large number of savers. According to one of the largest providers, their ‘average’ saver is now 39 years old and will likely have $115,000 at retirement.
Certainty is critical for savers, meaning future governments must not tinker with KiwiSaver’s structure. The tax credits we receive, our ability to access at 65 years, and employer contributions are key features that must remain constant. While governments shouldn’t change things up, over time what savers want is changing. And KiwiSaver providers will oblige by adjusting their offering. Here are three changes we’re expecting.
First, we’ll see more private asset investments in KiwiSaver. These will typically be share investments in private companies known as ‘private equity.’ This means investing in shares that are not listed on a stock exchange, which is hard or impossible for most investors to do currently.
Done well, private equity investments can deliver outsized returns.
At the moment the boutique KiwiSaver providers are leading the way in private equity while the large providers are sitting back and watching. For example, CareSaver, Milford and Booster have invested in private companies. In the case of CareSaver KiwiSaver, this has included investment in Rua Bioscience, which is now floating on the NZ stock exchange, and the on-line investment platform Sharesies. Expect the majority of KiwiSaver providers to include private equity investment in the years ahead.
Private assets can also be through loan transactions. As every saver in New Zealand knows, interest rates on bonds and bank deposits are ludicrously low. Skilled and innovative KiwiSaver providers can supplement these low rates by investing in private loan transactions, which again are difficult or impossible for most investors to access outside of KiwiSaver. This is relatively new for KiwiSaver however, with low-interest rates, we will see more. So far providers like CareSaver and Generate have announced private loan transactions.
Second, we’ll see fees come down. Remarkably over the last three years, two of the five largest providers have actually increased their growth fund fees, while only one has reduced its fees significantly. But the long-term trend is for lower fees.
It is worth remembering the cheapest option is not necessarily the best. A higher fee active manager may deliver better after-fee returns than a lower fee manager with a passive strategy. Investors should do their research.
Thirdly, we’ll see an even greater uptake of ethical investing. In 2016 people were shocked to find their KiwiSaver likely invested in cluster munitions, landmines, and tobacco. Providers then excluded these but simply avoiding companies causing harm to society will increasingly be seen as insufficient. More and more savers will want their KiwiSaver to invest positively as well as exclude harm.
There is evidence that companies with higher environmental, social and governance metrics are more resilient and deliver better financial returns. Ethical investing will increasingly be seen as a win for both investors and the planet. More and more consumers will want this style of investing, and more KiwiSaver providers will offer it.
As KiwiSaver balances grow, investors are demanding more from their KiwiSaver in terms of fees, transparency and returns. And now that switching from one provider to another is a fast and easy process, KiwiSaver providers need to deliver the change investors want.
In the years ahead we will see more private equity, lower fees and increased ethical options in KiwiSaver. A great outcome for investors.
John Berry is chief executive at Pathfinder Asset Management, and KiwiSaver provider CareSaver. His views in this article are general only and are not recommendations for any particular person in relation to any share or financial product.