NZ Herald 26 January 2008

AA year isn’t nearly enough. Any investment like KiwiSaver needs about ten years to judge fairly.

The article you mention is one of two recent stories critical of KiwiSaver. While I felt that the first one was particularly misleading — and said so in a response in the Herald — in some ways I’m glad it has all happened now.

First, for those who might have missed the articles, here’s a summary:

• On Saturday January 12, a Business Herald article began “KiwiSaver has so far been a KiwiLoser, eroding more wealth that it is creating.” This is largely because of terrible recent share market performance.

  It quoted a former teacher 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.”

• In my response, on January 17, I said those very government contributions make all the difference, turning “any otherwise mediocre investment into a really good one.” Also, any investment that includes shares will quite often do badly over short periods. But over ten years or more, investors usually do really well — even before the government contributions.
• The next day, the Herald wrote about a more comprehensive look at KiwiSaver funds over the first three months, by fund analysis firm FundSource. “KiwiSaver funds with the highest exposure to shares have taken a beating,” the article said.

This time, the article emphasised that investors should focus on the long term. Great! But it still didn’t point out that the low returns were on all the money in the KiwiSaver funds — including the government’s contributions.

If members of KiwiSaver looked at the return on just the money they put in, their returns would be much higher. And, if you’re comparing KiwiSaver with any other use of your money, that’s the number to look at.

Several people have criticised the Business Herald for running articles about KiwiSaver performance over such a short period, but I’m not one of them.

FundSource and others are going to do the analysis anyway, and there will always be some media that will publish it. Even if they all agreed not to, I don’t like the idea of journalists withholding information from the public.

I just hope that from now on both points are made — the importance of the long-term perspective, and the need to allow for the big government subsidies — and also employer subsidies after April 1.

Why am I glad this has all happened so soon after KiwiSaver started? Members and would-be members of the scheme are learning fast about share market fluctuations, and how well they can cope with them.

If they feel panicky, they can move to a conservative KiwiSaver fund that invests in bank term deposits, government bonds and the like. Those funds probably won’t grow nearly as fast over the long term, but they are much less volatile. And it’s far better to move to such a fund now, while you have a low account balance, than to do so later and cement in losses on many thousands of dollars.

Meanwhile, those who can cope with volatility will probably be pleased over the next few years that share markets plunged before they had contributed much. They’ll be getting much better buys with the money they and their bosses and government contribute to KiwiSaver from now on.

AOh dear. I never thought of that. What’s more, it seems that I might have been a bit too hasty in one point of criticism.

I suggested the government may have set the first year forecast for KiwiSaver membership on the low side, so Michael Cullen and Peter Dunne could repeatedly say, in an election year, “Wow, aren’t we doing well,” by exceeding the forecast.

I received a long response from a Treasury spokesman, saying the forecasts were based on what happened with other New Zealand and overseas super schemes. He added, “some of the unanticipated take-up has come from children (nearly 16,000 applications for those aged under 15 years to date), and people nearing retirement (37,000 applications to date are for those aged 60–64).”

Now that KiwiSaver is up and running, the forecast has more than doubled, from 276,000 to 563,000 by June — including a relatively small number in non-KiwiSaver schemes with some KiwiSaver benefits.

The original first-year forecast was apparently more than a number plucked out of the air. So I owe Cullen and Dunne an apology.

I wonder, though, what they gain from pointing out how wrong the original forecast was. Should they be given credit because more New Zealanders than their officials expected are accepting a gift that is offered to them?

In any case, it might not end up to be all that many more. The Treasury spokesman added that, “There is even greater uncertainty” over whether people have simply got in faster than expected, and there may not be a higher take-up in the long run.

I stand by my other criticisms in the article — that KiwiSaver has flaws because it was set up too hastily, and that the government is paying huge amounts to many people who were saving for retirement anyway — although admittedly there must also be many new savers.

Enough comment on your postscript. Your main point is that the government incentives — including the $1000 kick-start and the first $20 instalment of the $40-a-year fee subsidy — have greatly boosted your KiwiSaver account.

I can’t check your maths on the return because I don’t know when you made your contributions, but it doesn’t matter much. The gain on your money is super.

Your returns won’t be quite so good in the future, as the kick-start is a one-off boost. Still, the tax credits and any employer contributions you receive will continue to greatly enhance your investment.

AYou’ve done superbly on several counts. Paying off your mortgage fast, and increasing your payments when you get a pay rise, is a great idea. The prospect of being mortgage-free 12 years sooner speaks for itself.

You’ve also joined KiwiSaver for the right reason — because the government and your employer will help you to save. And I applaud your long-term attitude to the fund’s performance.

I wonder, though, if you might consider gradually moving to less conservative KiwiSaver funds as you get to know more about markets. You’ve got at least 23 years before you can get the money out, and it will almost certainly grow faster in a fund with more shares and/or property. But do it only if you come to feel comfortable with some volatility.

A few other points:

• I would never count you as someone who wasn’t already saving before KiwiSaver. Repaying a loan is one of the best ways to save. It improves your wealth in just the same way as an investment with an after-tax and after-fees return equal to the mortgage interest rate. The introduction of KiwiSaver has simply given you a more lucrative way still.
• Once you have been in KiwiSaver for a year, I suggest you use mortgage diversion. That allows you to put up to half your own KiwiSaver contributions into repaying your mortgage. As long as you still leave at least $1043 of your contributions in KiwiSaver each year, you will still receive all the KiwiSaver incentives.
• You comment that the company super scheme has performed well. So have most super schemes in the last few years — because of strong share market performance. Those who get caught up in the recent share woes need to look back a bit. The New Zealand market, for instance, rose 25 per cent in 2003, 25 per cent in 2004, 10 per cent in 2005 and 20 per cent in 2006 — before going nowhere last year.

If you had invested $10,000 in the market at the start of 2003, it would have more than doubled by the end of 2006. It might be a while before we see such numbers again, but it might not.