Spending the savings. KiwiSaver products and practices - the challenges and problems. Michael Chamberlain MCA NZ Limited MCA

Transcription

1 Spending the savings KiwiSaver products and practices - the challenges and problems Michael Chamberlain NZ Limited 30 November 2012

2 Spending the savings How can middle-income retirees best use their savings for what might be a very long or very short retirement There are virtually no New Zealand products that spread the risk of outliving capital yet individuals and society have a vested interest in facilitating this process Source: Symposium briefing notes

3 Conclusions It is unlikely that a suitable third-party product could ever be developed that is fair to retirees and taxpayers The pricing of the risks make the residual return too low for most retirees The profit motive of the industry makes it uncompetitive Compliance and costs are prohibitive With NZ Super as it is, what benefits do taxpayers and society get?

4 The basic problem Human nature Asymmetric information (Lack of ) competition High cost of change Sold not bought relationship (/distribution) Conflicting stakeholder objectives Regulators vs manufacturers vs distributors vs buyers Pricing of risk & unknowns It s a long time

5 Human nature More Greed Accept Easy Free Lazy Something for nothing Control Cost Regulation, rules, solvency

6 Tug of war Avoiding market failure Product makers Regulators Profit Distributors 3 against 1 is unfair Retirees Income after tax and costs that matches expenditure

7 Asymmetric information Supplier knowledge advantage Retirees believe that there are experts Buyer uninterested (or not main focus) Short-termism Can t think beyond immediate future Complexity & risk The world is against the individual buyer

8 $ Expenditure cash flow pattern Variable expenditure 1 st Death Old age Unexpected one-offs (eg Rangitoto eruption) NZ Super Regular income n

9 Understanding the unknowns Expenditure cash flows Income, lump sums, unexpected events Inflation Duration (life expectancy) Longevity - medical advancements Age you lose your marbles Investment returns Average, pattern, income/growth split Tax, management fees, costs Country/city of final retirement

10 Understanding the unknowns Support Advice, education Capability Legislative change Regulation Compliance costs Tax Product provider survival Market share, economies of scale

11 Market behaviour $ The portfolio approach to investing doesn t work in retirement Retirees don t like as no guarantee market will rise time

12 Buyers get what is left Strategy, markets, manager decisions Gross investment return - Cost of regulation (hard & soft) - Tax (& tax compliance) - Cost of manufacturing - Cost of distribution - Industry profit - Cost of advice Remember there will be extended periods of low returns = Consumer outcome Total costs are too high to give a reasonable net return

13 Returns vary a lot over 25 years year NZ government bond yield (%) And then take off tax and inflation Jun 87 Jun 92 Jun 97 Jun 02 Jun 07 Jun 12

14 Resulting in a range of nominal incomes 1,100 1, Net income per $10,000 if spread over 25 years And also take off inflation Jun 87 Jun 92 Jun 97 Jun 02 Jun 07 Jun 12

15 Pricing risk Profit Return on capital Distribution costs Administration costs Statistical margin Expected risk The total margins and costs, price risk out of the market for most Retirees are better to take on and manage their own risks at least in the early years

16 The role of government Reduce quantity & improve quality of regulation Adopt principles and not rules Ensure certainty & stability Adopt the sunlight gold standard Focus on standards of outcomes and not documentation of process (of inputs) Improve tax system Encourage risk management & not risk avoidance

17 The solution Implementation Advice Tailored support Life expectancy Income level Education Risk guidance Investor Efficient flexible facility + Supported self service = Solution centric Investments Management Flexibility No surprises Benefits Lump sums Low cost Irregular income Targeted strategy Regular income

18 Discussion "If something cannot go on forever, it will stop." Economist, Herbert Stein