New Zealand is a financially sophisticated and developed, small South Pacific country with a population of 4 million people.
The economy is traditionally heavily based on agricultural exports. However, over recent times successfully reduced our dependence on dairy, meat and wool exports, and expanded into forestry, horticulture, fishing, manufacturing and tourism.
Australia (closest neighbour) is the largest trading partner followed by the US and Japan. Recent expansion of trade has been the fastest into Asia.
General Economic Development New Zealand's growth as measured by gross domestic product (GDP) stagnated through the late 1980s and early 1990s. Growth picked up through the 1990s but at a level below OECD averages. This was negatively affected at the end of the decade, firstly by the slowdown in the growth of our trading partners resulting from the so-called Asian crisis, and secondly by two consecutive years of drought.
Fortunately the NZ economy rebounded quickly and real GDP growth over the period 1990 to 1997 averaged 2.4% (below are OECD levels). From 1997 performance has improved with GDP growth averaging 3.0%.
On current forecasts NZ's real GDP growth is expected to average 3.3% over the 5 years to the end of 2008 ahead of expected average growth of 2.6% across the OECD (this is below the Government's optimistic plans to achieve 4.0% GDP growth).
New Zealand's inflation performance has improved markedly over the 1990s. During the 1970s and 1980s inflation as measured by CPI was amongst the highest and most volatile in the OECD. Through the 1990s average CPI and volatility fell below most other countries. Inflation details are:
==================================================================== 1999 2000 2001 2002 2003 2004 (P) 1.0% 1.7% 3.1% 2.6% 2.5% 1.75% -------------------------------------------------------------------- New Zealand has a low income per capita compared to other countries. -------------------------------------------------------------------- New Zealand Income Distribution -------------------------------------------------------------------- Income of $38,000 and below 2,410,000 78.6% Income over $38,000 436,000 14.2% Income over $60,000 220,000 7.2% (Source: IRD 2002 income distribution) ====================================================================Despite improvements across a range of economic indicators which has seen NZ's per capita income since 1992 rise at a rate close to that of other developed countries, the low level is a major issue. NZ's relative GDP per capita ($US):
======================= New Zealand $18,000 Australia $25,000 US $33,000 OECD $22,500 =======================
The low-income levels coupled with an unfriendly taxation environment for savings have had an important bearing on the slow growth of the funds management industry in NZ compared with many other developed economies.
SAVINGS AND PRIVATE HOUSEHOLDS
NZ has a poor savings record.
============================================================= Household Savings Rate (% of disposable income) Actual Projected ============================================================= 1999 2000 2001 2002 2003 2004 2005 ============================================================= -4.8 -0.8 -4.4 -3.7 -4.25 -6.25 -6.25 ============================================================= (Source: Reserve Bank of NZ Money Policy Statement June 2002) =============================================================Household debt has soured from 58% of household income in 1991 to 113% in 2002. Outstanding balances on credit cards have increased by over 50% in the past 3 years. The reasons for NZ's low personal savings rates are covered in the section, Savings - NZ Savers Seriously Disadvantaged. TAXATION SYSTEM: Features of the NZ tax system include the fact that reliance for most of the tax revenue results from a broadly based income tax and consumption tax (GST) which produce 85% of the Government's revenue. Also NZ's income tax is only moderately progressive in nature. A further feature is that NZ has a company tax system based on imputation. The tax rates applying in NZ are: PERSONAL RATES Taxable income $1 Tax Rate %
====================== 0 - 38,000 19.5 38,001 - 60,000 33.0 over 60,000 39.0 ======================
COMPANY TAX RATES
All companies taxed at 33%.
Goods and Services Tax (GST)
Levied at 12.5%.
Aspects where the NZ tax system varies from most similar overseas countries include:
Lack of threshold level of income tax before tax is payable. (Although tax credits are available for low-income families.)
Lack of special incentives and exemptions in our income tax and GST bases, such as tax incentives or exemptions for retirement savings.
Lack of a capital gains tax. (Note: however, that managed funds are required to pay tax at 33% on realised capital gains. In certain circumstances individuals who regularly buy and sell shares may be deemed "traders" and become liable to tax on capital gains.)
SAVINGS - NZ SAVERS SERIOUSLY DISADVANTAGED: In 1992 NZ moved to a voluntary model for taxation of savings. Effectively this anticipated that if a neutral playing field exists without taxation intervention, then savers will have the option to save at the level and through the vehicles that suit their personal needs. This has resulted in:
No incentives - NZ does not offer any taxation incentives to save, except through a recent change that allows higher income individuals to benefit from a 6 cent tax advantage by contributing to an employer sponsored superannuation scheme. This 6 cent advantage is in the process of being offered to low income workers but the option rests with the employer to decide to participate.
No compulsion - NZ does not operate any form of compulsion to save. However, it is argued that New Zealand Superannuation funded out of general taxation is a compulsory savings scheme NZ operates a Taxed/Taxed/Exempt regime (TTE) for saving. This is unique and is a model that has failed dismally.
NZ savers disadvantaged - Many NZ savers are disadvantaged by saving through managed investments. The 'neutral playing field' was never achieved:
Those savers earning at the lowest marginal tax rate of 19.5% are taxed at 33% on the investment return of a managed investment. Whereas they could invest directly and pay tax at their lower marginal rate.
Managed investments are taxed at 33% on realised capital gains. Direct investment by an individual saver would not normally attract capital gains tax.
These are serious obstacles to the managed funds industry; as a consequence the "value proposition" for fund managers needs to be that much more attractive.
Given the poor and declining savings levels the unique and "voluntary" model applying in NZ has been a failure, a fact that is slowly dawning on NZ politicians.
DEMOGRAPHICS: NZ is in a similar demographic situation but not as advanced as many western countries. New Zealand faces an ageing population.
The dependency ratio (ratio of 65+ to employed) currently stands at 25%. By 2020 it is predicted to be 35%, peaking at close to 60% by 2040.
The fiscal consequence is that the cost of Government sponsored superannuation will grow from the current manageable 4% of GDP to over 9% by 2040. Increasing health costs from an ageing population will place further pressure on Government to fund an ageing population.
Government spending is predicted to increase from the current levels of 32% to around 40% of GDP by 2040. It is calculated that this would require taxes to increase by one third.
OLD AGE PROVISION: Public retirement income is provided through New Zealand Superannuation (NZS).
This is a flat rate universal entitlement which has until recently been entirely funded out of general taxation on a pay-as-you-go basis.
Individuals qualify on attaining age 65. Rates are reviewed each year and adjusted for movements in the average weekly wage. The test requires payment to equate to 65% of the average wage for a married couple. There is no means or asset test applying to eligibility.
In an attempt to reduce the future fiscal cost of NZS, Government introduced "refunding" from 2001, which requires Government to set aside a sum determined annually by Treasury from surpluses which is separately invested and will be called upon from approximately 2025 to ease the fiscal burden. Predictions suggest that prefunding will account for approximately 14% of NZS at the maximum.
ASSETS UNDER MANAGEMENT AND FUNDS FLOW: Unlisted retail investment funds under management by NZ fund managers decreased 7.4% to $14.235b to the year ended 30 June 2003. This follows a 6.5% decrease the previous year to June 2002.
Fund net outflows slowed over the June 2003 quarter in sharp contrast to the previous December and March quarters.
Recent results indicate an improvement in investor confidence to "a wait and see what happens" rather than withdraw their savings.
Investor preference for defensive funds continued with the largest inflow of funds for the year to mortgage funds (continuing the trend that emerged through 2002).
ASB/Sovereign (owned by the Commercial Bank of Australia) remained the largest overall retail fund manager with assets of $2617.4m and an 18.4% market share.
ING/ANZ Bank improved to second position ($2121.5m), 14.9% market share.
Westpac/BT Funds ($1832.8m), market share 12.9% was third. The strengths of the banks' distribution capabilities and the joint ventures with fund managers that they have developed have become very apparent with the top 3 places in net assets under management being held by these organisations. AMP ($1534.3m) 10.8%, and Tower ($1377.4m) 9.7%, completed the top 5. These five largest fund managers hold 66% of total retail net assets, while the ten largest account for 93.8%.
The 1.2 billion reduction in assets under management has seen a flow of funds into the security of low yield term deposits offered by banks or into high yielding capital notes/bonds which in many cases have little security, a fact many investors do not understand. The concern is that a number of investors have crystallised their losses out of equity funds into investments with little more than "junk bond" status and interest rates that do not adequately recognise that risk.
DISTRIBUTION OF INVESTMENT FUNDS: Statistics relating to the distribution of investment funds are not maintained. The main channels for distribution are adviser/broker networks which it is estimated account for 90% of retail distribution.
As seen from assets under management statistics, Banks continue as a major source of distribution of managed funds products with trained investment advisers employed by Banks being the main point of sale. Across the counter sale of products has been limited to life insurance and simple superannuation products.
The quality of advice by Bank advisers has been tested by the recent market downturn with the number of complaints referred to the Banking Ombudsman escalating 400%.
It is not clear if this increase is reflected by other distribution systems. The use of internet sites has been limited to the provision of information. No significant move to the internet as a form of distribution has appeared to date. Cross-border distribution largely occurs between NZ, Australia and UK based open-ended investment company products (OEICs)
The distribution of other foreign funds is difficult to gauge. These would appear to be largely limited to stock market listed products distributed through share brokers. However, the global market downturn has limited sales of all offshore products.
LEGAL DEVELOPMENTS:
Regulatory News concerning Investment Funds: NZ has a low level of regulation of the managed funds industry. The Securities Act and Regulations represent disclosure-based regulation. Issuers are required to provide subscribers with an Investment Statement containing key facts about the investment, and are required to provide a prospectus on request. Financial statements must comply with relevant laws and Standards.
Investment advisers are also regulated on a disclosure basis but consideration is being given to some form of registration. Details of personal experience, qualification or if required the adviser has been declared bankrupt, are also only to be provided on request. Government has signalled its intention to review existing regulation of advisers.
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The breakdown of individual funds at 30 June 2003 was as follows:
$NZ millions (6/03 - 6/02)
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Equity Funds: 2284.6 3082.9
Bond Funds: 1415.9 2017.0
Money Market: 1193.6 1100.9
Balanced Funds: 5565.0 5840.9
Real Estate Funds: 659.0 746.5
Mortgage Trusts: 3009.0 2456.8
Other 107.4 195.9
Total $ 14235.3 15440.9
($NZ Millions)
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Total by Product Categories - Retail Funds (6/03 - 6/02)
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Investment Trusts 6024.1 6784.3
Superannuation Trusts 5279.9 6046.8
Insurance Bonds 1425.3 1573.1
Group Investment Funds 1506.0 1036.7
Total 14235.3 15440.9
($NZ Millions)
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