KiwiSaver rot runs deeper than defaults
The flawed KiwiSaver default provider system is symptomatic of wider problems with the scheme that need to be addressed if it is to achieve its objectives.
Wednesday, April 11th 2012, 7:00AM 5 Comments
by Niko Kloeten
Michael Littlewood, co-director of the Retirement Policy Research Centre, has called for major changes to be made when the government reviews the current default provider contracts in 2014.
He has come up with an alternative plan that would do away with default providers altogether and give new entrants to KiwiSaver one year to make up their minds about which fund to join or have their money refunded by the IRD.
This is an out-of-the-box idea but it has merit in that it would force people to actually make a choice about who they want to put their money with - why are so many people fussy about which car or TV they buy but indifferent about who manages their life savings?
However, there are a number of other problems with KiwiSaver's design that also require urgent government attention.
One of these is the overly conservative asset allocation of KiwiSavers, which is largely a product of the high number of people ending up in default schemes, which are required by law to have extremely conservative investment strategies.
A whopping 60% of KiwiSaver money is invested in fixed interest, compared to only 46% for non-KiwiSaver superannuation funds in New Zealand.
This issue is closely tied to the lack of financial advice around KiwiSaver - research by Dr Claire Matthews of Massey University has found KiwiSavers are more likely to use rely on the advice of family and friends rather than financial advisers.
This is partly structural and partly attitudinal - despite all evidence to the contrary many New Zealanders think they are capable of managing their own investments without help.
Despite hopes that KiwiSaver would cause financial literacy to increase as if by osmosis, large numbers of people remain appallingly misinformed about how the scheme works.
Making KiwiSaver compulsory wouldn't solve these problems; in fact, it would probably exacerbate them as it would result in more financially illiterate people being shepherded into a scheme they don't want to be a part of.
Niko Kloeten can be contacted at firstname.lastname@example.org
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