Our comprehensive review of default KiwiSaver fund performance to March 2017, identifying who has the best long-term returns

By David Chaston

KiwiSaver is now an important part of our savings landscape.

We have more than $41 billion invested and at risk in these schemes. This exposure is growing by more than $7 bln per year, pushed ahead by strong contribution flows from employees, employers, and the now-minor Government contributions.

In the year to March 2017, the 2.7 mln members contributed $2.94 bln of their own after-tax money, employers contributed $1.76 bln, and the Government chipped in a bit over $700 mln, mainly via the member tax credit. That totals $5.4 bln in contributions. On top of that, another $1.6 bln was earned by these funds, after tax and after all fees.

Given we started the year with $33.9 bln, the gain of $1.6 bln represents an increase of +4.72% in after tax, after fee earnings. 

As equity and bond markets have been buoyant over the period, perhaps that is not quite as impressive as it should be. The NZX50 gained +6.58% in that period, the S&P 500 gained a more impressive +14%.

For those still in a default fund, perhaps that non-choice has sort of worked out okay for you.

We track returns on a regular savings basis. Our model assumed a 28 year old started contributing the minimum amounts based on a median income on April 1, 2008, and we have been tracking that income as our reference person ages from that date and the KiwiSaver conditions change. By the end of March 2017 - nine years later - they have now had total contributions to their scheme from their pay, their employer's contribution, and the Government's top-ups, of $27,485. As they aged and move into higher earnings bands due to education, seniority and promotions, the related employer portions grow commensurately.

The conservative nature of these default funds has actually enabled members in them to do okay. Over the past nine years, just about everyone in them got at least +4% pa after tax, after fees. And given that for most of that time, a one year term deposit would have returned about 4.3% before tax (for most people a 3.5% after-tax return, with no fees), they can be happy they are generally ahead of that option.

The best performing default KiwiSaver fund is the Mercer Conservative, returning +4.8% per annum over and above contributions.

Some funds are generating much less, but they tend to be those that did not start in 2008. These have hit the investment cycle when conservative asset returns have shrunk. As a reference, in the past two years, the benchmark one year term deposit rate has been about 3.3% before tax (2.7% after tax). Bond yields have also shrunk, although for those already in, bond prices have risen which are positive to unit prices.

So perhaps 'low yields' are not a great excuse; after all, four of the five full-period KiwiSaver default funds have managed to return 4.5% or more over the past three years. Active management by a professional should pay off, and pay off over and above the fees you pay. And that seems to be true for the main default funds.

You won't be able to grow your KiwiSaver nestegg much above average returns if you stay with a default option. But in theory, the downsides should be limited.

Default Funds      
Cumulative $
contributions
(EE, ER, Govt)
+ Cum net gains
after all tax, fees
Effective
cum return
= Ending value
in your account
Effective
last 3 yr
return % p.a.
since April 2008 X Y Z
to March 2017      
$
% p.a.
$
       
 
 
 
 
 
Mercer Conservative C C C 27,485 6,543 4.8 34,029 4.3
ANZ Default Conservative C C C 27,485 6,153 4.6 33,638 4.5
ASB Conservative C C C 27,485 5,819 4.3 33,304 4.5
FisherFunds2CashEnhanced C D C 27,485 5,818 4.3 33,303 4.6
AMP Default C C C 27,485 5,179 3.9 32,664 4.2
                 
BNZ Conservative C C C 14,927 1,480 4.4 16,407 4.4
Kiwi Wealth Default C C C 10,252 531 3.5 10,783 ...
Booster Default Saver C C C 10,252 489 3.2 10,741 ...
Westpac Defensive C C C 10,252 472 3.1 10,725 ...
---------------                
Column X is interest.co.nz definition, column Y is Sorted's definition, column Z is Morningstar's definition
C = Conservative, D = Defensive

If you are not about to retire in the next five years or so, you should seriously review why you are in a default fund. We will review the track record performance of other classes of KiwiSaver funds over the next week or so, but being in KiwiSaver is a long term commitment and you should be applying long-term strategies to this investment. That may well mean accepting some higher level of risk to gain a higher level of returns. (Remember those S&P 500 returns above.) Over a long term, that is usually a sensible strategy. Sure, bumps in the road do come around (like the Global Financial Crisis) and they can knock growth fund returns. But as we have seen post-GFC, the bounce-back can turbo charge your results.

It used to be said that buying a house was the single biggest investment decision you will ever make. But given our extended life expectancies, that is no longer true. Our 28 year old will have been in KiwiSaver for 37 years if they retire at age 65. And they may well work on for another 5 years or so, and then look forward to yet another 20 years of life. All up that is 60+ years of needing these retirement funds to work for you - a far longer and far larger investment commitment that buying a house with a 30 year mortgage. And over that lifetime, you will seriously limit what you end up with if you stay 'conservative' or in a default fund over the whole period. What you will be giving up will be large.

Some changes and updates

We have reviewed and updated some of the processes in our regular savings analysis of all KiwiSaver funds on www.interest.co.nz and as a result the numbers may differ from previous releases. The key changes are a downward revision to the monthly contributions a person on an average income and 28 years old in 2008 would have made, and an enhancement to the way in which tax liability for the funds was calculated. These changes affect all funds analysed equally, so there is no material change to the relative positioning.


KiwiSaver default funds are only part of a broader range of conservative funds available. Many of the 'traditional' conservative and cash funds are under performing the default funds. We will look at the rest of the conservative funds in another article.

For explanations about how we calculate our 'regular savings returns' and how we classify funds, see here and here.

There are wide variances in returns since April 2008, and even in the past three years, and these should cause investors to review their KiwiSaver accounts especially if their funds are in the bottom third of the table.

The right fund type for you will depend on your tolerance for risk and importantly on your life stage.

You should move only with the appropriate advice, and for a substantive reason.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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11 Comments

With extended lifespans some suggestions for a portfolio mixture include bonds and shares at 65. The shares would be a smaller component and would be worth selling near the end of a bull run rather than hoping you're still alive after a collapse and recovery in the stock market.

There have also been suggestions that the younger population may live to 120 but that is optimistic, along with a prediction of working until you reach 100. It is advisable to plan on living longer than you expect (my calculations are for living until age 95).

"And over that lifetime, you will seriously limit what you end up with if you stay 'conservative' or in a default fund over the whole period. What you will be giving up will be large."
Ok, fair enough you do that then..... Me: I am not sure that this statement will turn out to be a correct one in 10yrs/ 20yrs/ 30yrs time.
eg Remember how long it took since the commencement of kiwisaver for the growth funds to overtake the conservative ones.

The power of the exponential curve. Excellent information DC. Meanwhile most of the common taters here remain obsessed with house prices. But give it time and they will wake up as the numbers begin to roar..

Mercer .... This isn't the same Mercer that bankrolls the cancer otherwise known as Breitbart News, is it?

No ! Completely different.

Thanks David. And my apologies to Mercer NZ

Breitbart News is cancerous? You mean they don't follow the mainstream narrative? You've got me intrigued, I must check it out

Yup, that's the one. It's part of the alt-right media that peddles conspiracies, fake news and alternative facts. It's part of the alt-right media that creates an *alternate* reality for the people who cannot take personal responsibility for their lack of status in this reality. Sad!

I keep seeing commentary saying that being in a default fund is a mistake. But that seems to be on the assumption that the KS fund is your total portfolio. If one already owns property and equities and wants to take advantage of the KS benefits, it seems to be rational to do it with the lowest cost in fees and a cash/bond default fund fits the needs of the overall portfolio.

I keep seeing commentary saying that being in a default fund is a mistake. But that seems to be on the assumption that the KS fund is your total portfolio. If one already owns property and equities and wants to take advantage of the KS benefits, it seems to be rational to do it with the lowest cost in fees and a cash/bond default fund fits the needs of the overall portfolio.

It's the opposite. If you want to hold cash as a part of your portfolio hold it outside of KS. You, for a most part, can't touch KS until you are 65. You should have the money in something that will growth instead of receiving net interest minus fees which gives you a return less than current inflation.

The default funds are a mistake unless you are close to 65 or past 65 and you are going to draw the funds.