Change KiwiSaver default funds…
…but educate too
All the wrong people are ending up in KiwiSaver default funds — or are they? That depends on their financial knowledge, temperament and home ownership plans.
Default funds are the investments that the government puts KiwiSavers into if neither they nor their employer has chosen a scheme.
Run by big financial companies AMP, ASB, AXA, ING, Mercer and TOWER, the default funds invest only about 20 per cent in “growth” assets — mostly shares but sometimes also a bit of commercial property. The rest of the money is in conservative investments like bonds and cash.
About a third of all KiwiSavers are in default funds. Apart from those under 18, the younger the KiwiSaver member, the more likely he or she will invest in such a fund. About 52 per cent of KiwiSavers aged 18 to 25 are in default funds, according to data that Government Actuary David Benison presented at Conferenz’s recent SuperFunds conference. The percentage falls steadily with age, to only 16 per cent for those 61 and over.
The reason for this probably lies in KiwiSaver auto enrolment. When you take a new job, you automatically join KiwiSaver unless you opt out. Young people tend to changes jobs more often, so a much bigger proportion of young KiwiSaver members are auto enrolled than older members — who usually sign up with their current employer or approach a provider directly.
Auto enrolment doesn’t mean you have to be in a default fund. You can choose any provider and fund you like. But auto enrolled people probably know less about investment options and so stick with the fund they have landed in. We therefore end up with default funds dominated by the young.
Arguably, older people should dominate. Conventional wisdom says the young should invest their retirement savings heavily in growth assets. They have several decades to recover from any market crash, and over the long haul shares and property tend to grow faster than bonds and cash.
With this in mind, the Capital Market Development Taskforce — of which I’m a member — has recommended a change in the “investment mandate” when the next default fund tender takes place in 2015.
The taskforce suggests two possible new mandates. One is investing in balanced funds, which hold about 50 to 70 per cent growth assets. The other is investing in funds in which the risk is adjusted with age. Young savers invest mainly in riskier assets but the risk gradually decreases as savers approach retirement.
Sounds good, but there are two complicating factors — which the taskforce noted:
- Inexperienced investors might panic when the share or property market plunges, and their KiwiSaver account halves, or worse.
- Many young KiwiSavers will want to withdraw some of their money to buy a first home as early as three years after they join. With such a short investment horizon, they should be in a low-risk fund.
Neither issue needs to be a problem. KiwiSaver members can move funds whenever they wish, so anyone unhappy with a riskier default fund after 2015 could go elsewhere. Many providers offer funds with similar risk to the current default funds, and there are even lower risk options.
However, the government would need to be certain that people in default funds got the message about the level of risk they were taking on. And I would like to see even more than that.
It would be great if people not planning a first-home withdrawal also got the message that investment risk is not necessarily bad. Sticking with a riskier fund through thick and thin is usually a winning long-term strategy.
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.