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.
(EE, ER, Govt)
+ Cum net gains
after all tax, fees
= Ending value
in your account
last 3 yr
return % p.a.
|since April 2008||X||Y||Z|
|to March 2017||
|ANZ Default Conservative||C||C||C||27,485||6,153||4.6||33,638||4.5|
|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||...|
|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.
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.