KiwiSaver rot runs deeper than defaults

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.

Comments from our readers

On 11 April 2012 at 5:31 pm denis said:

Maybe I spend my life skipping though sun-kissed meadows on prozac, but I honestly cannot see the default system as a problem. The Govt/IRD don't want to be a quasi-provider. The default providers are doing the job just fine.

Since 2007, all kinds of merry hell has plagued investors - but the default providers have delivered exactly what it says on the tin. Boringly reliable, conservative, solid and low-cost.

Nobody's stuffed up the admin and the process via the IRD/Employer payrolls works really well.

On 13 April 2012 at 5:13 am Collin said:

KiwiSaver has been one of the most successful plans of its kind in the world, so I struggle with the term 'KiwiSaver rot'. KiwiSaver advice from a financial advice is not the only source of assistance - people get assistance from family and friends on a whole host of matters so why should KiwiSaver be any different. The benefits of a financial adviser are by no means guaranteed and the cost of financial advice can be prohibitive. My understanding is that the current default system - while not perfect - has worked well. My main concern is that it has benefited large financial institutions to date and established smaller providers should somehow also benefit from the system.

On 17 April 2012 at 12:29 am George said:

Whilst Mr Littlewood's comments re: default providers come from the Retirement Policy Research Centre perspective, we must take them with a pinch of salt, given that he is a director of a non-default KiwiSaver provider.

On 21 May 2012 at 2:24 pm Martin said:

Average returns of KiwiSaver conservative funds for year 2011 are below the level of simple savings account. How does that make KiwiSaver such a great investment option? KiwiSaver is huge looser and without the government's incentives probably no one would join. The government has to bribe people with their own tax money to join the poorly performing schema. Just check the link below and compare KiwiSaver performance against other common investments: http://www.localbulletin.co.nz/exposing-kiwisaver-performance-vs-other-investments-returns

On 22 May 2012 at 2:39 pm Mal said:

Martin, the period you have identified is particularly short.

Granted the Govt contributions are an incentive, but that is what governments do ....incentivise behaviour.

As mentioned 12 months performance is not an ideal measure for an investment time horizon of 30 years (in my case)

The local bulletin you have provided is absolute junk. It compares the gross return of the ANZ Serious Saver (even though it says Net Return) and the average net return of a range of investment strategies available through KiwiSaver. So please don’t use that to form your opinion, further to that - have you ever seen the transaction costs associated with investing in Gold?

In summary you might have a one good point, but the supporting research is considered poor.

With regard to KiwiSaver if you acknowledge - as an individual this is the system, and ask ‘how can I get the most out of it’ I’m sure you’ll be pleasantly surprised on retirement day.

Best wishes

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

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