New Zealanders face a challenging reality when it comes to retirement. A recent study has shed light on the fact that the current superannuation system falls short in providing retirees with a comfortable life post-work. To bridge this gap, the KiwiSaver scheme was introduced in 2007, aimed at encouraging citizens to build their retirement savings. However, over the years, this scheme has been subject to numerous alterations, potentially jeopardizing its core objective of supporting individuals in their retirement years.
In a recent turn of events in late 2024, the government proposed changes that could potentially make it easier for KiwiSaver managers to invest in private assets. While the government argues that these modifications could unlock substantial funds for essential infrastructure and business capital, concerns have been raised regarding the implications of these changes on KiwiSaver members.
Expanding Investment Horizons
Currently, KiwiSaver managers primarily invest in publicly traded assets, such as stocks and bonds. The proposed changes seek to broaden the investment opportunities available to KiwiSaver investors, including ventures into infrastructure projects, unlisted companies like KiwiBank, and property investments, among others. By increasing exposure to private assets from the current 2-3 percent to a level akin to Australian super funds (15 percent+), significant investment could be unlocked for infrastructure and business capital.
While the prospects of utilizing KiwiSaver funds for crucial infrastructure projects are appealing, the benefits to individual investors may not be as substantial. The Ministry of Business, Innovation and Employment posits that private assets could potentially enhance fund returns and reduce risks associated with stock and bond markets. However, KiwiSaver members may face the risk of being tied to a specific fund provider or having their funds fragmented across multiple providers if they choose to switch. Additionally, concerns loom over the lack of transparency surrounding the fees charged by managers.
Navigating Challenges with Private Assets
One of the advantages of investing in publicly traded assets lies in their liquidity, ease of trading, and transparency. Private assets, on the other hand, present a different set of challenges. Fund managers are currently mandated to release funds within ten days when switching managers. However, large investments in illiquid private assets could pose liquidity issues if a surge of investors decides to switch providers. The proposed changes would allow fund managers to retain a portion of investors’ funds until private assets can be liquidated, potentially prolonging the period investors are tied to a particular manager.
Furthermore, the government’s proposal includes alterations to the calculation of reported fees by allowing managers to exclude costs associated with private assets. This move aims to incentivize managers to invest in private assets, which typically incur higher costs due to the need for specialized teams and periodic valuations. However, this could obscure fee transparency, making it challenging for New Zealanders to compare the fees of different funds effectively.
Complexities and Concerns
Beyond fee transparency, several other issues loom over the proposed changes to KiwiSaver. With 21 providers in the market, nearly half managing less than NZ$1 billion in assets, many private asset investments could require substantial capital, potentially leading to overexposure to a few large investments. Valuing private assets also poses a challenge, as their market worth depends on the prevailing market conditions at the time of sale.
Moreover, the reflection of private asset values in unit prices, impacting the buy-in and sell-out prices for investors, raises concerns about transparency and market fluctuations. As KiwiSaver assumes a pivotal role in New Zealanders’ retirement planning, any changes to the scheme must undergo rigorous evaluation to maintain trust and ensure financial security in retirement.
Aaron Gilbert, a professor of finance at Auckland University of Technology, underscores the importance of careful consideration and evaluation of changes to KiwiSaver to uphold its primary goal of securing financial stability in retirement. As the landscape of retirement planning evolves, it is crucial to navigate these changes judiciously to safeguard the interests of KiwiSaver members and bolster confidence in the scheme.