KiwiSaver mismatch a 'huge challenge' for advisers

New data showing 60% of KiwiSaver money is sitting in fixed interest products highlights a huge challenge for financial advisers, a fund manager says.

by Niko Kloeten

The scheme continues to grow at a torrid pace according to the Reserve Bank's quarterly survey of managed funds, with total funds under management more than doubling from $5.6 billion in March 2010 to $11.3 billion in December 2011.

KiwiSaver is the only part of New Zealand's $67.5 billion managed fund industry that is growing, and it is rapidly catching up to other superannuation funds, which dipped slightly to $18.5 billion under management in the latest survey.

However, the KiwiSaver numbers also support concerns raised by the fund management industry and financial advisers about overly conservative asset allocation.

Of the $11.3 billion in KiwiSaver, $6.7 billion (60%) is invested in fixed interest products, $4.7 billion of which is invested in New Zealand including $1.1 billion (10% of total KiwiSaver money) in deposits.

By comparison, other superannuation funds have only 46% ($8.6 billion) invested in fixed interest, with $4 billion of that invested in New Zealand, including just under $600 million in deposits.

NZ Funds Management chief executive Richard James said the figures reflected the large number of people in default schemes, and the "relatively passive nature" of decisions people have made about where to invest.

"There's a massive massive challenge for advisers and for the government around the million or so people who are yet to make a real decision about their capital - it's a very big issue."

James also warned that investing in fixed income isn't without its own risks, particularly if inflation picks up.

"They might get lucky to an extent; the default choice over the last few years has been the best performer but that's unlikely to continue."

He said the issue of KiwiSaver asset allocation is much wider than just the investors themselves, with ramifications for the whole economy.

"A large proportion of our country's superannuation is earning cash less frictional costs, which is not a good outcome for anybody except maybe the businesses getting paid for those frictional costs.  It's not good for the investors and it's not good for New Zealand. 

"If you use the old adage that you subtract your age from 100 to work out what your allocation to growth assets, it would seem like we have a hell of a lot of old people around.  In reality the opposite is true."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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