Taskforce report promising but devil in detail

Media Release

Capital Markets Taskforce report promising but devil in detail: Mercer

Wednesday 16th December 2009

The Capital Markets Taskforce report released today sets the scene to improve New Zealand’s capital markets and the adequacy of individuals’ savings, but now the challenge will be in implementing more solutions according to consulting, outsourcing, and investments firm Mercer.

Mercer’s New Zealand Business Leader, Martin Lewington, said, “On balance we are happy with the recommendations but developing solutions and adoption of policy in some areas such as protecting New Zealand’s ageing population against longevity risk in retirement and encouraging a savings culture that has broader economic and social benefits for New Zealand is the next challenge.

“The recommendations as a package create a platform for industry, regulators, and Government to start the journey to re-build New Zealander’s trust and confidence in the financial system, which is vital to growing capital markets in New Zealand and hence, the growth of the New Zealand economy as a whole,” he said.

“It’s good to see recommendations around retirement product innovation in the report, however introducing annuities is not a silver bullet answer to addressing the adequacy of retirement savings in New Zealand and a need to reduce reliance on NZ Super.

“We stand by our suggestions referenced in the report around the possibility of purchasing more NZ Super and this was referenced, without much detail, in the taskforce report. Currently we don’t have the framework or products to help people manage their money through their retired life as well as their working life and we’ve got a long way to go before we’ll see a serious improvement New Zealander’s ability to manage their accumulated capital in retirement,” he said.

Mercer’s response to other issues in the Capital Markets Taskforce report include:

Diversification of Savings

Addressing the broader issue of diversification of savings Mr Lewington said, “We believe diversifying the concentration of savings in the housing sector and spreading it to other areas, including but not limited to KiwiSaver, will have benefits for New Zealand.”

“From a consumer perspective it will reduce concentration risks of an individual having all their eggs in one basket and from New Zealand’s perspective it has the potential to provide additional capital for investment.

“We believe New Zealanders do need to save more and we see the opportunity to build a large capital base, and at a minimum diversify our savings, as only having benefits for all New Zealanders,” said Mr Lewington.

Transparency of fees

Fee disclosure, transparency of fees and standardisation of disclosure is critical to improving New Zealander’s ability to save and appropriately prepare for retirement, which has subsequent benefits for New Zealand’s capital Markets.

“Transparency of fees is fundamentally one of the key areas where regulators could assist all savers in New Zealand.

“KiwiSaver was a good start but there are gaps in the current system that will prevent it from becoming a truly world-class retirement system, and that could potentially hurt Kiwis at both an individual and economic level,” Mr Lewington said.

According to Mercer, the problem stems from a lack of standardisation around fees and pricing in relation to KiwiSaver. Currently some providers quote their expected returns net of (after) tax, investment fees and other expenses (including various combinations of these) while others do not.

“It’s too difficult for consumers to make direct comparisons between KiwiSaver products. KiwiSaver should be simple, yet for many members trying to get a balance on their fund can be a difficult task.

“The New Zealand fund industry has decided to predominantly quote unit prices which are net of fees and gross of tax. Quoting unit prices in this way is potentially misleading as customers cannot identify the actual return they will receive from each fund once tax has been deducted.

“Mercer advocates the introduction of standardised fee disclosure because we believe it will make product comparisons easier for researchers, advisers and consumers,” said Mr Lewington.

Mercer calculates unit prices net of tax and fees on a daily basis. By calculating unit prices this way, the investor can find out the true value on a daily basis. If a member has 100 units and the published unit price is $1 then the member can calculate that they will get $100 if they leave today. It is that simple.

Mercer believes guidance or governance is required to ensure consumers receive the full picture when comparing fees and returns between schemes. The growing number of websites, tools and researchers that provide general information, KiwiSaver comparisons and fee calculators have proven in some cases to be a source of confusion. Such a lack of governance means many may be making inappropriate decisions. The appointment of a regulator, charged with devising and enforcing an agreed industry standard, could help remedy these issues and must be considered.

Financial literacy

“Financial literacy in New Zealand has to improve if we are going to cope as a nation with the financial burden of our ageing population and still grow our economy.

“For this to happen, there has to be a partnership between KiwiSaver providers, regulators and public sector institutions such as the Retirement Commissioner. We think there should be a simple and goal based strategy to tackle this important issue.

“Greater financial literacy is essential because it can empower KiwiSaver consumers to make informed decisions about the issues and choices they face. Improving the financial knowledge of consumers won’t solve the fee debate but it will give them the basic understanding of investment principles (including risk), and teach them what they need to know to make an informed decision and meet their financial goals,” said Mr Lewington.

Financial Literacy and education as well as the need for clear and transparent disclosure, which in turn assist, are alluded to in the Capital Markets Taskforce report but to be clear the areas which we believe are important, include:

 Starting financial education at school level and we know that this is being driven by the Retirement Commissioner. Financial literacy is a lifelong skill/tool that we believe will hold everyone who acquires these in good stead. Starting early is important and good habits developed here will stay with people for life. This is a theme that is becoming more prevalent the world over.

 Ensuring there are clear options and good communication for retirees at retirement i.e. what are the risks they face and what are the options they have. Mercer believes there seems to be a policy vacuum in the post retirement space i.e. what do retirees do when they retire with their accumulated savings.

“We believe basic education around factual information explained in plain English is the key.

“The Capital Markets Taskforce report also recommended that financial literacy may involve a compulsory levy which is set aside for education. This levy would be built into products and effectively funded by investors. We believe this is an investment for the future and will ultimately be of benefit to all New Zealanders,” Mr Lewington said.

Better regulation and oversight

“Good governance and oversight are welcomed in New Zealand. While we all want to balance the red tape needed and the cost of this, good governance – both in regulation and in the policing of this plays an important role in capital markets around the world,” said Mr Lewington.

Mercer believes this is of fundamental importance and will

 Give consumers confidence the government is taking oversight of the capital markets and savings industry;

 Make providers more accountable to end users (which can only be a good thing);

 Provide a regulator with a “big stick” to pursue those institutions which do not follow the legislation 100%. Partial compliance is not an option.

“It is time to draw a line here and draw up a clear and unambiguous governance framework, where clear and transparent fee disclosures form a part, and which also empowers the regulator to take action early and to a greater extent than regulators were empowered in the past.

“For any organisation where good governance is part of the culture there is nothing to fear from greater governance requirements and in fact we strongly welcome this,” said Mr Lewington.

ENDS

About Mercer:
Mercer is a leading global provider of consulting, outsourcing and investment services, serving over 25,000 clients worldwide. Mercer consultants help clients maximise the effectiveness of their employee health, welfare and retirement programs, and optimise workforce performance while managing costs. The firm provides customised administration, technology and total benefit outsourcing solutions. Mercer’s investment services include global leadership in investment consulting, retirement plan design and governance, and multi-manager investment management. Mercer’s global network of 18,000 employees, based in more than 40 countries, ensures integrated, worldwide solutions for clients who wish to establish global policies and procedures while allowing for the flexibility to accommodate local cultural, legal and regulatory requirements. Our locally based professionals are also available to serve mid-size companies and to address country specific issues and opportunities.

In New Zealand, Mercer is one of the largest providers of corporate superannuation services and is also one of six government selected default KiwiSaver scheme providers. Mercer has been operating in New Zealand for more than 35 years and has offices in Auckland and Wellington.

For more information, visit www.mercer.co.nz

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