Default conservative funds are costing KiwiSavers

Thursday 19th January 2012

People who join conservatively managed KiwiSaver funds by default are missing out on as much as $72,000 each over their lifetimes and should be required to be higher-risk investors early in their lives, according to ANZ New Zealand.

Research by the bank and its funds management subsidiary OnePath New Zealand estimates about 191,000 people don’t actively monitor their KiwiSaver investment and don’t adjust their risk settings as a result.

If they started out in a growth fund and reduced their level of risk as they got older, they would accumulate an average $320,000 in KiwiSaver - a so-called ‘life stages’ strategy.

By comparison, those investors are currently automatically put into conservative funds, and are only building a $248,000 nest egg, creating a funding pool of around $13.8 billion that investors and fund managers are missing out on.

“Our research demonstrates that over the long term, investors are likely to be significantly better off through the life stages approach than with the current default ‘conservative option’,” ANZ wealth managing director John Body said in a statement.

“Over the medium to longer term, and this is what the vast majority of retirement savings plans are designed for, conservative funds can seriously disadvantage the saver.”

Under the government-mandated scheme, KiwiSaver new members are automatically enrolled into one of the six default schemes with conservative settings, and ANZ wants the government to change that mandate to the life stages approach.

The Investment Savings and Insurance Association said the default approach putting KiwiSavers in conservative funds did a good job to preserve capital, “but is not the best place to be long term.”

Financial literacy has been a key plank in trying to educate the nation into making better investment decisions, and the lack of it is often blamed for the billions of dollars lost in the finance company collapse through the latter half of the past decade.

Retirement Commissioner Diana Crossan has been at pains to stress one of major areas of concern is the lack of understanding about investment returns and the relative risk.

Last year, Finance Minister Bill English pressed ahead with plans to automatically enrol all New Zealand employees into the KiwiSaver scheme from the 2014/15 financial year, provided the government’s books are back in surplus.

That was in response to the rising cost of New Zealand’s pension bill, which makes up an eighth of government spending and has kept bodies including the Treasury, International Monetary Fund and Retirement Commission pressing for action on the level and age of entitlement to New Zealand’s universal superannuation.

The Treasury has estimated GST would have to rise to 19 percent or personal taxes would need to increase by $30 a week from early next decade to maintain the current system.

Alternatively, the government could slash total spending by about 7.5 percent from the early-2020s.

The Savings Working Group’s February report pressed for tax reform as a means to improve the nation’s savings rate, and found people under the age of 45 don’t have security for pension income because national superannuation can’t survive in its current form.

(BusinessDesk)

BusinessDesk.co.nz

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