An analysis of the latest electricity and KiwiSaver transfer statistics confirms that New Zealanders have a short-term attitude to money.
We transfer from one electricity provider to another to save a few hundred dollars, but we stick with low-risk KiwiSaver funds even though this may cost us tens of thousands of dollars in the longer term.
Recently released figures show that 418,209 electricity customers, representing 20.3 per cent of the total market, switched providers in the 2015 calendar year compared with only 157,809 KiwiSaver transfers in the June 2015 year. The latter figure represents just 6.2 per cent of total KiwiSaver members.
Electricity transfers have fluctuated between 17.8 per cent and 20.3 per cent over the past five years while KiwiSaver transfers have oscillated between 5.3 per cent and 6.4 per cent over the same period.
Just over 1.94 million electricity customers have switched providers over the past five years compared with a total market size of 2.06 million at the end of 2015. Consumers switch because of the “What’s My Number” campaign, intensive advertising by retailers and the desire to reduce their electricity costs.
According to the Electricity Authority, these switches delivered annual savings of approximately $180 per transfer in the 2014 year.
Retailers offer discounts of around 15 per cent, sometimes more, to attract new customers. These discounts are effectively an incentive for on-time payments.
In recent years retailers have offered residential customers a credit of between $100 and $200 on their electricity bill for switching. These offers are often accompanied by price freezes or fixed-term contracts.
The following figures show total customers at the end of 2015, with net gains or losses since December 2010.
- Genesis Energy: 531,066 customers at the end of 2015 (up 2272 since December 2010)
- Contact Energy: 429,610 (down 49,284)
- Mighty River Power: 390,883 (down 17,056)
- Meridian Energy: 279,657 (up 11,371)
- Trustpower: 258,100 (up 35,634)
- Todd Energy: 82,672 (up 39,162)
- Pulse Energy: 54,509 (up 35,511)
- King Country Energy: 17,445 (down 1155)
- New market entrants now have 16,200 customers
Trustpower has made a takeover offer for King County Energy and holds 61.9 per cent of the target company. Buller Electricity has made a successful takeover offer for Pulse Energy, with the latter delisting from the NZX next week.
The net gains and losses illustrate that there has been a huge amountof churn but only limited gainsand losses for the individual electricity retailers.
By contrast, only 0.65 million KiwiSaver members have transferred over the past five years even though there is a strong argument that they should also be looking at alternative options. These 0.65 million transfers compare with 2.53 million KiwiSaver members in June 2015.
KiwiSaver members should be considering alternative options because the $6.9 billion allocated to nine default funds returned an average 4.8 per cent in 2015, compared with an average of 9.2 per cent for the five top-performing balanced funds.
In theory, default fund investors would have been approximately $300 million better off at the end of the year if they had transferred to these balanced funds.
That $300 million is a substantially higher figure than the gains from electricity transfers.
Needless to say, the gains from electricity switching are certain and immediate whereas the gains from higher-risk KiwiSaver funds are uncertain and more long-term.
When we compare the five-year returns of the default KiwiSaver funds, which were 6.0 per cent a year, and the five top-performing balanced funds, which were 10.0 per cent, the monetary gap is even wider.
If – and it is a big if – the balanced funds continue to achieve returns of 10.0 per cent a year and the $6.9 billion in default funds is transferred to balanced funds, then the $6.9 billion would be worth $11.1 billion at the end of 2020, a gain of $4.2 billion.
If the $6.9 billion remains in default funds, and they continue to return 6 per cent a year, then they would be worth $9.2 billion at the end of the five years. The $1.9 billion difference between the 10 per cent and 6 per cent returns represents over 40 per cent of total annual New Zealand residential electricity expenditure.
Our focus on small, short-term economic gains and neglect of potentially substantial long-term benefits is nothing new. Adam Smith wrote in the 18th century: “The pleasure which we are to enjoy10 years hence, interest us solittle in comparison with thatwhich we enjoy today”.
Richard H. Thaler studies human economic behaviour in his recent bookMisbehaving: The Making of Behavioral Economics.
Thaler writes that US economist Paul Samuelson argued that if given a choice between a great dinner this week or one a year from now, most people would choose one this week.
Rod Duke of Briscoe is well versed in this theory as his aggressive discounting and advertising, which has a strong emphasis on encouraging short-term spending, has been highly successful.
American economist Irwin Fisher believed that an individual’s time preference depends on his or her level of income, with individuals on below average income more impatient than those who are better off.
Fisher viewed the impatient behaviour of low-income workers as partly irrational.
Consistent with Fisher’s theory is the likelihood that individuals with below-average income have a bias towards conservative default KiwiSaver funds, while higher earners prefer balanced and growth funds.
KiwiSaver cash funds, which generate low returns and have $1.2 billion under management, also seem to be more popular with below-average income earners because they have much lower balances than other KiwiSaver funds.
Thaler illustrated his argument with an example of two tennis fans offered the following choices: 1). A first-round ticket to Wimbledon this year. 2). A quarter-final ticket next year. 3). A ticket to the men’s final in two years.
The response to this choice will tell us quite a lot about these individuals, including their attitude to investing. Both want to go to the final, but an individual with a short-term horizon will probably chose a first-round ticket this year while the individual with a longer horizon is more likely to choose a final ticket in two years’ time.
Studies by Adam Smith, Paul Samuelson, Irwin Fisher and Richard Thaler on human behaviour partly explain the huge number of electricity transfers, compared with KiwiSaver, although aggressive advertising by electricity retailers is also a contributing factor.
Investors, including KiwiSaver members, should take a long-term view and aim for a finals ticket at Wimbledon, although the eventual outcome is less certain than in Thaler’s example.
Most KiwiSaver providers have a wide range of funds on offer, including conservative, balanced and growth funds, and members can spread their investments throughout these funds.
A mix of conservative, balanced and growth funds is a good option. Younger KiwiSaver investors should have a stronger bias towards growth and balanced funds while those over 55 should place more emphasis on the balanced and conservative options.
Astute KiwiSaver decisions will deliver far more rewards over the longer term than any switch from one electricity retailer to another.
Disclaimer: This article originally appeared in the NZ Herald and is intended to provide general information only. It does not take into account your investment needs or personal circumstances and so is not intended to be viewed as investment or financial advice. Should you require financial advice you should always speak to an Authorised Financial Adviser.