KiwiSaver Behaviour During COVID-19 CFA Society of NZ Webinar, Tuesday May 12 th 2020 Murray Harris SF Fin
Disclaimer This presentation is intended to provide general information only. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment or financial advice. Under no circumstances should investments be based solely on the information provided. Milford presentations are intended to be informative and to provide educational information only. Please be aware that investing involves the risk of capital loss. Should you require financial advice you should always speak to an Authorised Financial Adviser.
Milford KiwiSaver Plan • Since 2007 grown to ~$2bn in size with ~36,000 members • Not one of the 9 government appointed default providers • Highly engaged members.~70% actively contributing and ~75% received the government contribution last year • Average member balance ~$55,000 (industry avg. ~$20,000) 9th largest provider by funds under management, 14 th by • membership Source: Morningstar, Financial Services Council & Milford. All data as at 31 March 2020
Behavioural finance insights inform our response to COVID-19 “We are right to fear COVID -19, and we are right to fear stock market volatility and loses. But we should not let fear turn into panic.” - Meir Statman on Coronavirus
COVID-19 Pandemic impact on KiwiSaver • How did the market respond? KiwiSaver industry FUM Dec 31 st 2019: $63.6 billion – – COVID-19 markets wiped $4.5 billion off – 31 March industry FUM: $59.1 billion (-7%) – Multi-sector category avg. returns March qtr (-2.2% Conservative to -14.5% Aggressive) • How did KiwiSavers respond? – Members moved ~$1.4 billion to Conservative & Cash Funds – 138,441 on Savings Suspension. +5,493 more than Feb – 75% increase in Savings Suspensions due to Financial Hardship (vs. March ‘19) – 1,958 Financial Hardship Withdrawals. +502 (34%) vs. Feb Source: Morningstar KiwiSaver Survey March 2020 and IRD KiwiSaver Member Statistics March 2020
The impact of the wrong decision can be significant Fight or flight are normal human reactions. We should not let fear turn into panic. KiwiSaver is no different – we are all human Members can either stay the course, play the long game for long- term reward… …Or they can flee (panic sell) – with potentially significant financial consequences How much could the wrong move cost at retirement?
Financial impact of switching from Growth to Conservative then back Case Study – 35yr old Member: $700,000.00 • Not intending to make First Home Withdrawal $682,670 • Income $55,000 p.a. $600,000.00 KiwiSaver Balance • Current balance $20,000 $500,000.00 • 3% employer / 3% employee contributions • Switch from Growth to Conservative $400,000.00 $650,140 • After 2yrs switch back to Growth $32,530 • $300,000.00 Financial impact at age 65? less $200,000.00 Switch to Conservative for 2yrs $100,000.00 Remain in Growth Fund $- 35 40 45 50 55 60 65 Age Source: Milford Retirement Calculator. Assumptions are Growth Fund 8% p.a. Conservative Fund 4% p.a. Returns are after fees and tax. Annual wage inflation of 2.5% and inflation of 2%. Chart is for illustrative purposes only.
Financial impact - Switch from Growth to Conservative and stay there Case Study – Same Member: $700,000.00 • Switch from Growth to Conservative permanently $682,670 $600,000.00 • Financial impact at age 65? $370,940 KiwiSaver Balance $500,000.00 $400,000.00 $300,000.00 Switch to Conservative Fund $200,000.00 Remain in Growth Fund $311,730 $100,000.00 $- 35 40 45 50 55 60 65 Age Source: Milford Retirement Calculator. Assumptions are Growth Fund 8% p.a. Conservative Fund 4% p.a. Returns are after fees and tax. Annual wage inflation of 2.5% and inflation of 2%. Chart is for illustrative purposes only.
Impact of other interruptions to long-term savings • Same Member scenario – Impact of 3yr Savings Suspension – Impact of a 50% Financial Hardship Withdrawal ($10,000) Impact of a 3yr Savings Suspension Impact of 50% Financial Hardship Withdrawal $700,000.00 $700,000.00 $600,000.00 $600,000.00 Financial impact at age 65 Financial impact at age 65 $500,000.00 $500,000.00 $100,626 less $92,980 less $400,000.00 $400,000.00 $300,000.00 $300,000.00 $200,000.00 $200,000.00 $100,000.00 $100,000.00 $- $- 35 40 45 50 55 60 65 35 40 45 50 55 60 65 3yr Savings Suspension No Savings Suspension 50% SFH withdrawal No Withdrawal Source: Milford Retirement Calculator. Assumptions are Growth Fund 8% p.a. Conservative Fund 4% p.a. Returns are after fees and tax. Annual wage inflation of 2.5% and inflation of 2%. Chart is for illustrative purposes only.
Importance of Communication Financial service providers must hold the trust and confidence of investors Providers must communicate, inform, educate and advise Without this, investors will make poor decisions with potentially large negative financial consequences
Final Thoughts We should not let fear turn into panic Panic leads to poor decision making Poor decisions can have a significant impact on retirement savings KiwiSavers should seek advice and consider staying the course
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