This article was published on 5 November 2011. Some information may be out of date.

Too many KiwiSaver non-contributors miss out on the good stuff

Not far from half of all members of KiwiSaver are not contributing regularly to the scheme — whether they be employees on a contributions holiday or non-employees who are simply not putting money in. What a pity.

There are a couple of factors that help to explain why 45 per cent of KiwiSavers are classified as non-contributors in the Financial Markets Authority’s annual report on KiwiSaver.

For one thing, a non-contributor is defined as someone who has not contributed in the previous two months. So it will include some non-employees who are, in fact, depositing money, but as lump sums only once or a few times a year.

Also, non-contributors are disproportionately children. It’s estimated that more than 90 per cent of under-18s don’t contribute after joining, probably because they are not eligible for tax credits or compulsory employer contributions.

But neither of these factors explains the jump in non-contributors from 40 per cent last year and 23 per cent the year before.

Presumably many people have stopped KiwiSaver contributions because they feel they can’t afford them, which is understandable. But if that applies to you, I urge you to try to resume.

If you are 18 or over, your contributions are boosted considerably by the government and, if you’re employed, your boss.

Even after the scheduled incentive cuts come fully into effect, from April 2013, the contributions from an employee earning $60,000 will be doubled by government and employer contributions. And it’s better still for those on lower incomes. For every dollar contributed by an employee on $20,000, others will contribute $1.33. Under Labour’s proposed increases in employer contributions, the deal would be even better.

What does it all amount to? If the money you contribute is doubled, you’ll get twice as much out in retirement. That’s powerful stuff. It’s worth making a real effort to keep up your contributions now.

Some other highlights of the KiwiSaver report:

  • More than 52 per cent of KiwiSavers are women, and the gender imbalance is particularly big between ages 36 and 56. Conclusion? Perhaps the wisdom of middle-aged women!
  • Despite apparent interest in ethical or socially responsible funds — and there are more than half a dozen such funds to choose from — only 7,570 people were in these funds in March 2011.
  • In the year ending March this year, 2285 people switched KiwiSaver funds twice, 256 switched three times, 112 switched four times, and 40 switched five times. That’s too much switching.

Sure, there are good reasons to move from one of your provider’s funds to another one. You might find you can’t cope with volatility, or you are approaching withdrawal time, so you go to a less risky fund. Or you might decide to take on more risk in the hopes of gaining higher average returns.

It also makes sense to switch to a new provider to take advantage of lower fees or better communications, or because you decide the new provider has better or more trustworthy management.

But nobody switches twice or more times a year for those sort of reasons. I fear the frequent switchers are moving to funds that have reported high recent returns. That’s bad news.

Not only do high performers not necessarily do well in the next period, but there’s a tendency for them to do particularly badly. That’s because high performers are often high-risk funds.

Lots of research shows that people who chase returns end up considerably worse off than those who find a fund with a suitable risk level for them and stick with it.

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.