NZ Herald article 17 January 2008

I feared this would happen. Share markets would go through one of their down periods right after KiwiSaver started, and people would leap to the conclusion that the retirement savings scheme was not a good idea.

Sure enough, a story to that effect featured prominently in the Weekend Herald’s Business section last Saturday. The story, quoting a former high school maths and economics teacher, began “KiwiSaver has so far been a KiwiLoser, eroding more wealth that it is creating.” That is grossly misleading. Anyone who avoids KiwiSaver because of it is doing themselves a big disservice.

Before we look further at that, it’s important to acknowledge that there’s plenty to criticise about KiwiSaver:

• Michael Cullen and Peter Dunne should be challenged about their enthusiastic announcements of the numbers who have signed up. Most recently, they said 381,000 had joined KiwiSaver in its first six months — far more than the 276,000 expected for the first full year.

  But where did the 276,000 come from? Before KiwiSaver started, Inland Revenue said 700,000 New Zealanders change jobs every year — almost all of whom will be automatically signed up for KiwiSaver in their new jobs.

  These people can opt out after two to eight weeks. But early data show roughly half are sticking with the scheme — and well they might, given the incentives. Let’s guess at 225,000 out of 350,000 for the half year.

  Add to that the rush of people savvy enough to realise they would be mad not to join KiwiSaver- and the sooner the better — and 381,000 in the first six months seems disappointing rather than exciting.

  I can’t help but wonder if the government set the first-year goal at 276,000 so they could repeatedly say, in an election year, “Wow, aren’t we doing well.”

• The scheme shows many signs of being put together in great haste. One example: the name of the tax credits. Many people think they can’t take advantage of them because they don’t pay tax. But the credits in fact have nothing to do with tax. The government simply puts the money in your KiwiSaver account.

  And there are many other KiwiSaver features that could have been simpler or more efficient if officials had been given more time to develop them. What was the hurry? Again we must cast our eyes towards the end of this year.

• Through KiwiSaver, the government is spending huge amounts of money persuading thousands of people to do what they were going to do anyway.

  Many of us who were already saving for retirement have simply moved some of that saving into a KiwiSaver fund, grinning as the $1000 kick-start and $40-a-year fee subsidy are added to our accounts. Our grins will be even wider when we get our first tax credits — up to $1043 a year — some time after July. And employees will be happier still, when compulsory employer contributions start in April.

  Sure, there are undoubtedly thousands of others who have joined KiwiSaver who weren’t saving before. But who knows how many? Over all, it’s not clear that KiwiSaver is a good use of taxpayer money.

For individuals, however, it’s a different story. It’s crystal clear that contributing to KiwiSaver is a great use of their money — regardless of the poor recent share market performance noted in last Saturday’s story.

The story quoted former teacher Gary Osborne, who searched websites and found that in all but 5 of 24 KiwiSaver funds, “savers would be better off if they had slept with their funds under the mattress for the first six months of operation, before allowing for the government contribution.”

But let’s look more closely at his last six words. They make all the difference. The whole point about KiwiSaver — the reason I and others say everyone should be in it — is that the government contributions turn any otherwise mediocre investment into a really good one. Not allowing for them is like celebrating Christmas without Santa Claus.

There’s another important issue here, too. It’s a big mistake to judge any investment that includes shares over any period less than about ten years — let alone six months. And it’s actually just three months, as KiwiSaver providers didn’t get the money until October. Before that it sat in Inland Revenue, earning interest.

The share market often declines over short periods, but the long-term trend is always upwards. It’s rare for people who invest in shares or share funds to lose money over ten or more years, and common for them to do extremely well. And that’s before adding the KiwiSaver incentives.

Still, some people — presumably including Osborne — can’t cope with seeing the value of their investments fall. For them, there’s a great alternative: a conservative KiwiSaver fund that invests in stable assets such as bank term deposits and government bonds.

Such funds won’t grow nearly as fast as riskier funds over the long term. But by the time you add the KiwiSaver incentives, you can be confident you will do better than in a bank account — let alone under any mattress.

Mary Holm is a freelance journalist, a director of Financial Services Complaints Ltd (FSCL), a seminar presenter and a bestselling author on personal finance. From 2011 to 2019 she was a founding director of the Financial Markets Authority. Her opinions are personal, and do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it.