KiwiSaver Annual Report 2022-23: Key takeaways for prospective customers

Introduction

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KiwiSaver is a voluntary, work-based savings initiative that helps New Zealanders save for their retirement. It is one of the most popular and successful schemes in the country, with more than 3.2 million members and over $93 billion in funds under management (FUM) as of 30 June 2023.

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The Financial Markets Authority (FMA), which is the principal conduct regulator of financial markets in New Zealand, recently published the KiwiSaver Annual Report 2023, which provides an overview of the performance and trends of the scheme in the year ending 31 March 2023. The report also summarises the FMA’s activities as a regulator relating to KiwiSaver during the previous financial year.

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In this post, we will highlight some of the key takeaways and insights from the report, and what they mean for KiwiSaver members and providers.

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KiwiSaver held firm in a volatile year

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The year ending 31 March 2023 was a challenging year for investors due to the global pandemic and its economic impacts. The report shows that the average annual return for KiwiSaver funds was -2.5%, compared to 10.4% in 2022 and 8.9% in 2021. This reflects the volatility and uncertainty in the financial markets caused by COVID-19.

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However, the report also notes that many investments have recovered ground since then, as the global economy gradually reopened and vaccine rollouts progressed. The report emphasises the importance of regular contributions and long-term investing for KiwiSaver members, especially in times of market uncertainty.

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Despite negative investment returns, total Funds Under Management (FUM) rose by 4.3% to $93.7 billion, largely driven by contributions from members, employers and the Crown. The report praises the resilience and commitment of KiwiSaver members who continued to save for their retirement, even during difficult times.

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Growth funds became the most popular fund choice

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The report reveals that growth funds became the most popular fund choice for KiwiSaver members, accounting for 36% of FUM and 32% of membership. This reflects a shift towards more growth-oriented funds as people become more comfortable with the long-term nature of KiwiSaver and make more active choices.

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The report also attributes this change to last year’s default settings changes, which moved default members from Conservative to Balanced funds. The report warns that members should not chase past returns or switch funds based on short-term performance, but rather choose a fund that suits their risk appetite and time horizon.

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The report shows that there were more than 300,000 fund movements in 2023, with most of them being switches within the same provider. The report suggests that this could be a sign of increased engagement and awareness among members, but also cautions that some switches could be driven by inappropriate advice or marketing practices. The report states that the FMA will continue to monitor fund movements and ensure that providers comply with their obligations to provide clear and relevant information and guidance to their customers.

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Fees fell for the first time in KiwiSaver history

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For the first time in KiwiSaver history, fees did not rise, but rather fell by 8% to $664 million. This was due to the combined effect of lower default fund fees, some providers removing their membership fees, and others not earning the same level of performance fee as they might have in previous years.

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The report praises the providers who reduced their fees and urges others to follow suit. The report also reminds members that fees are only one factor to consider when choosing a provider or a fund, and that they should also look at other aspects such as service quality, communication and investment performance.

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The report shows that the average total expense ratio (TER) for KiwiSaver funds was 0.99%, down from 1.04% in 2022. The TER measures how much of a fund’s assets are spent on fees and expenses each year. The report also shows that there is a wide range of TERs across different fund types and providers, indicating that there is room for more competition and transparency in the market.

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Over-65s withdrew more but also kept more in KiwiSaver

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The report shows that over-65s withdrew more than $2.8 billion from their KiwiSaver accounts in 2023, an increase of 46% on last year. This could be a response to market volatility and the changing interest rate environment. However, the report also shows that most over-65s are keeping their money in KiwiSaver and choosing the drawdown option, which allows them to withdraw their savings gradually and benefit from potential future growth.

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The report highlights that this option – sometimes referred to as ‘drawdown’ – is available to KiwiSaver members over 65 who want to leave their money in the scheme and access it when they need. The report shows that more than half of the members over 65 who made a withdrawal in 2023 chose the drawdown option, and that the average balance of these members was $44,000.

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The report encourages members over 65 to consider their retirement income needs and options, and to seek advice from their providers or financial advisers if they need help. The report also states that the FMA will work with the industry and the government to improve the availability and quality of retirement income products and services for KiwiSaver members.

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Hardship withdrawals and savings suspensions increased

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The report reveals two points of concern that indicate the financial stress faced by some KiwiSaver members due to the cost-of-living challenges. Firstly, hardship withdrawals increased by 36.7% compared to 2022, reaching their highest level in the wake of COVID lockdowns. Secondly, the number of members on savings suspensions increased by 19.8%, suggesting that some people were struggling to make regular contributions.

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The report urges members to resume saving for retirement as soon as possible and to seek help from their providers or financial advisers if they need support. The report also states that the FMA will continue to work with the industry and the government to ensure that KiwiSaver is accessible and affordable for all New Zealanders, and that there are adequate safeguards and assistance for those in financial hardship.

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Additional insights

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• The report shows that the average annual return for KiwiSaver funds was -2.5%, but this does not mean that all funds performed poorly. In fact, some funds, especially those with higher exposure to alternative assets such as private equity, infrastructure and hedge funds, delivered positive returns in 2023. For example, the Milford KiwiSaver Active Growth Fund had a return of 7.8% in 2023, making it the best performing fund in the growth category.
• The report reveals that growth funds became the most popular fund choice for KiwiSaver members, but this does not mean that all members are well-informed and confident about their fund choices. In fact, some members may have switched to growth funds without fully understanding the risks and rewards involved, or without considering their personal circumstances and goals. For example, the report shows that 18% of members over 65 were in growth funds in 2023, which may not be suitable for their risk appetite and time horizon.
• The report praises the providers who reduced their fees and urges others to follow suit, but this does not mean that fees are the only factor that matters for KiwiSaver members. In fact, some providers may have lower fees but also lower service quality, communication and investment performance. For example, the report shows that some default providers had lower fees than non-default providers, but also had lower member engagement and retention rates.

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These insights show that KiwiSaver is a complex and dynamic scheme that requires careful and informed decision-making by members and providers.

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Advice and tips on how to make the most out of your KiwiSaver account

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• Find the right fund: KiwiSaver is not a fancy savings account, but a genuine investment scheme. Your KiwiSaver scheme provider invests your money on your behalf in different investments such as cash, bonds, or company shares. All going well, by the time you’re eligible to withdraw your savings you’ll have some extra money on top of what you contributed. It’s up to you to choose the type of investment fund you want your money to go into. KiwiSaver scheme providers typically have a range of funds for customers to choose from, and each fund comes with its own level of risk. Generally speaking, the higher the risk an investment carries, the higher the potential return. A ‘growth’ fund will generally mean better returns over time but tends to come with more risk. A ‘conservative’ fund means less risk but generally means a lower return over time, so you need to choose the right one for your particular circumstances. Your financial advisor should be capable of clearly spelling out the differences between funds and may be able to offer advice on how to decide which fund is the best fit.
• Check your benefits: KiwiSaver brings with it a number of entitlements that can really pay off if you know about them. The government contributes 50c for every $1 you contribute to your KiwiSaver account, up to a maximum of $521 each year. This is called the Government contribution (previously called Member Tax Credit). It applies even if you make a lump sum contribution just before the annual cut-off of 30 June of each year. Did you know your employer may contribute the equivalent of 3% of your pay to your KiwiSaver account on top of what you pay? This is called the compulsory employer contribution. You may also be eligible for other benefits such as first home withdrawal or first home grant if you are buying your first home.
• Ensure you’re contributing enough: If you are employed, you will contribute at least 3% of your pay to your KiwiSaver account, but you can choose to contribute 4%, 6%, 8% or even 10%. The more you contribute, the more you will save for your retirement or your first home. You can also make voluntary contributions at any time, either directly to your provider or through Inland Revenue. To make the most of KiwiSaver, you should try to contribute at least enough to get the full Government contribution each year, which means $1,042.86 or about $20 per week.
• Check the tax rate: Your KiwiSaver investment earnings are taxed at your prescribed investor rate (PIR), which is based on your income level. The PIRs are 10.5%, 17.5% and 28%. You should check that you have given the correct PIR to your provider, as this will affect how much tax you pay on your KiwiSaver earnings. If your PIR is too high, you will pay more tax than you need to. If your PIR is too low, you will have to pay any tax shortfall at the end of the tax year and may also incur penalties and interest.
• Take a hands-on approach: KiwiSaver is a long-term investment scheme that requires patience, discipline, and guidance from trusted sources. You should not panic or make hasty decisions based on short-term fluctuations in your KiwiSaver account balance. However, you should also not ignore or neglect your KiwiSaver account. You should regularly review your fund choice, contributions, benefits, and tax rate, and make any changes if necessary. You should also monitor the performance of your fund and compare it with other funds in the same category. You should also read any communication from your provider or the FMA and keep yourself informed about any changes or updates in KiwiSaver rules or regulations.

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We hope these tips and advice help you make the most out of your KiwiSaver account, and choose a provider or a fund that suits your needs and goals. If you need more information or guidance on KiwiSaver, please contact us for a free consultation and a tailored plan for your future. We look forward to hearing from you soon!

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Conclusion

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The KiwiSaver Annual Report 2023 provides a useful snapshot of the state of KiwiSaver in 2023, but it also reminds us that KiwiSaver is a long-term investment scheme that requires patience, discipline and guidance from trusted sources. The report concludes by stating that the FMA will continue to work with KiwiSaver providers and other stakeholders to support and protect KiwiSaver members and help them achieve their retirement goals. The report also identifies some focus areas for the FMA’s regulatory activities in relation to KiwiSaver, such as member engagement, value for money, risk management and default funds.

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If you want to read more details or see some graphs and tables, you can download the full report from FMA KiwiSaver Report 2023.

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