Diversification is key to investing, but we can only invest our KiwiSaver with one scheme. Jenée Tibshraeny explores whether the system is due for a tweak

As the sizes of our KiwiSaver balances grow and new schemes enter the market, should the rules be changed so that we can split our investments between schemes?

Currently, we can divvy up our investments between funds as long as they remain with the same scheme - so put half with Scheme X’s growth fund and half with Scheme X’s conservative fund, for example.

This gives us some diversification.

But should those of us who want to diversify more, or simply take greater control of our money, be given the opportunity to do so?

Conceived 11 years ago, is the KiwiSaver scheme mature enough to handle a tweak?  

No - is the simple answer interest.co.nz received from the Commission for Financial Capability, the Inland Revenue (IRD) and the four KiwiSaver schemes it floated the idea with.

The reality is that it’s a struggle for most New Zealanders to even contribute towards KiwiSaver, consider their risk profile and move out of a default fund, let alone think about splitting their funds between schemes.

Do we need more opportunities to diversify?

Accepting the consensus that implementing a change is premature (at the very least), it is still worth asking the question: when the time is right, would investors really benefit from being able to split their investments?

Yes - but not always, says Mike Taylor, the co-founder of a new low-cost actively managed scheme, JUNO KiwiSaver.

Because most KiwiSaver funds are already diversified across asset classes (ie cash, bonds, shares) and largely within asset classes (ie funds that track the market), he says being with a different scheme doesn’t necessarily mean you’re achieving genuine diversification.

For example, the difference between an ANZ balanced fund and ASB balanced fund is going to be minimal over time, he says. 

Yet Taylor believes you could achieve real diversification investing in funds with different investment strategies - actively versus passively managed funds for example. This is where you might see some differences.

He still comes back to the more pressing issue of getting people engaged in KiwiSaver, as does Simplicity’s head of communication, Amanda Morrall.

She likens an uneducated person investing in both actively and passively managed funds for the sake of diversification to someone buying a range of ice-cream flavours hoping one’s going to taste better than the other.

Both Taylor and Simplicity accept they might attract more members if people could dip their toes in their relatively unique offerings, before diving in head first.

While Taylor would of course prefer investors made the complete switch, he recognises that giving them the opportunity to ease in gives new providers a better chance at cracking “a market that’s almost an oligopoly” controlled by the big banks.

Speaking of which, ANZ’s general manager of wealth products Ana-Marie Lockyer does not support a move to enable members to split their investments between schemes.

She says most schemes already offer a broad range of funds across the risk spectrum with diversified portfolios.

Is the cost of complexity worth it?

Cost is a big issue for Lockyer, as it is with the others interest.co.nz spoke to.

The IRD, which collects members’ KiwiSaver contributions from their employers before passing them on to their schemes, says it would have to redesign parts of its system.

It notes employers might incur costs keeping up to date with how members want to distribute their contributions.

Lockyer points out having multiple KiwiSaver accounts might also see members pay multiple fixed administration fees to their various schemes.

“The benefit of KiwiSaver is that there is only one KiwiSaver account per individual and this provides the basis for an effective and efficient superannuation system,” she says.

“Other countries, including Australia, who have previously allowed members to have multiple accounts across providers, are now looking to follow New Zealand’s ‘best practice’ superannuation system.”

The Commission for Financial Capability, in its 2016 Review of Retirement Income Policies, picked up on this point, saying Australia’s multiple scheme system has seen people struggle to keep track of their funds, contributing to a large number of “lost accounts”.

According to the Australian Prudential Regulation Authority, 40% of Australians with superannuation accounts have more than one account.

However the portion of people with more than one account has also declined slightly over time.

All in all, the Commission back in 2016 concluded: “At this point in the growth of KiwiSaver, the Commission does not view membership of multiple schemes as a priority.

“KiwiSaver providers are innovating and providing greater variety and flexibility in fund allocations and options to invest in other providers’ funds.”

What about the opportunities we already have to diversify?

This variety brings us to AMP and Aon, which enable their KiwiSaver members to invest in other providers’ funds through their schemes.

AMP members can invest in up to seven of the AMP, ANZ, ASB, Mercer or Nikko Asset Management funds it offers through its scheme for example. While Aon members can invest in up to four ANZ, Nikko Asset Management, Milford Assest Management and Russell Investment Management funds.

The way it works is that the IRD effectively passes your contributions on to AMP or Aon, which then distribute them between the different funds you’ve selected.  

AMP NZ managing director Blair Vernon says, “The beauty of that is you’ve got one KiwiSaver number, you’ve got one provider who produces your statement and everything else, but you’ve got a whole range of product choice underneath it.”

He says 15% of AMP’s KiwiSaver scheme members who have made an active fund choice (ie who aren’t in AMP’s default of Lifesteps funds), have selected a non-AMP managed fund.

The catch with this arrangement is the cost.

For example, those who have invested directly in ANZ’s KiwiSaver Growth Fund are paying 1.10% p.a. in fees, while those who have invested in this same fund via AMP, are paying 1.32%, according to interest.co.nz’s KiwiSaver data.

Vernon admits splitting your KiwiSaver between providers only really makes sense if you have a more substantial balance and you take particular interest in the underlying fund managers.

He says it’s a matter of the KiwiSaver system striking the right balance between “flexibility, efficiency and effectiveness.”

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27 Comments

Great to see your article supporting management of one's KS funds
Couple of points;
Sad that CFC position is simply based on the lowest common dominator; this is a baseless reasoning.
Secondly, diversifaction between say two providers provides diversification of risk. KS schemes are not government guaranteed as many think. Whilst providers face greater restrictions compared to fund managers, and although there has been stable economic times, there is very sound reason to diversify between providers in the long term.

Perhaps you could give me one scenario where being diversified between providers actually is a good idea? Because I can't think of one.

It's not diversification between K/S Schemes. Rather it is getting diversified between asset classes - even specific companies. You can easily find where any K/S fund has their investment allocated. If you want or need a different asset class exposure as time goes by and no one fund or scheme has what you want, having the option to have your K/S investment in more than one scheme will make a lot of sense.

I know some schemes offer life-stage options. But if you have put the time and effort into understanding what you want, it seems unsatifactory to have to be limited to their asset category (or even a specific target company) choices, ones you really don't want.

The issue won't apply to savers who don't want to go into that sort of detail. Their main role is to choose a manager, and leave it at that.

The post I was responding to was about diversification between KS providers.

And you can diversifiy between asset classes outside of kiwisaver if you want to, since kiwisaver is not tax advantaged after teh MTC and employer contribution, you simply put the minimum in a fund with asset classes you like, and with the rest of your savings you do it yourself outside of kiwisaver, without Kiwisavers associated restrictions.

Hi Pragmatist
In answer to your 16.10 post
Yes; most certainly do not contribute more than employer contribution/MTC which ever is the larger. Agreed, why lock your funds until 65 for no gain when most providers offer similar non-KS funds with greater flexibility to withdraw (especially in event of a desire to retire earlier than 65 or statutory age which at government in future may determine).
However, KS funds have the potential to soon grow to significant amounts. Try doing the sums on a 3pc (my iPad hasn't got pc symbol) contribution matched by employer plus MTC on $70000 pa compounded at a modest 5pc over 25 years. Then try telling me that it is not an insignificant investment sum.
Cheers

In inflation adjusted terms its two years income. So yeah, as far as preparing for 30years of retirement goes, it isn't a hell of a lot.

Hi Pragamist
In answer to your 15.34 post.
Whilst the risk may seem low at the present time, and that KiwiSaver providers work within certain regulatory constraints and are fairly well monitored, this not say that there is nil risk of a collapse of a provider. I also appreciate that kiwisaver providers are also usually a separate entity to their parent company (e.g. ASB Investments and ASB Bank)
However is there a nil risk of a collapse? It would not seem at the present time but the future is uncertain. Are banks at risk of collapse; well think BNZ within our life time, and both European and US banks at the start of the global crisis.
Are KiwiSaver providers as safe as banks? Is there a risk that a provider under current conditions be forever fail safe? I am not 100per cent confident.
If there was absolutely no risk. If not, why would the Government not openly provide a guarantee that KiwiSaver providers and funds are safe?
The risk may seem small however, it is safe practice to not have all investments with one bank, and equally I think it applies to KiwiSaver providers.
In my experience, besides BNZ, I have seen PSIS and financial companies go bust or near bust. I have also seen a number of instances where assumabily strong companies holding staff superannuation funds also go bust wiping out staff retirement savings. In such circumstances workers have seen their planned retirement funds disappear leaving them with a bleak (and very,very bitter) outlook.
OK, as I said, the government has requirements in place to lessen such occurrences with KiwiSaver providers,, but please do not assume that such regulatory requirements aren't fail safe. If they are; then lobby the Government to give you a guarantee because they don't at the moment.

Hmmm, but the provider doesn't have your money. They collapse, your investments get realised by the trustee and you transfer them to a new scheme with a different provider.

So the trustee is 100pc fail safe?
Why does the government not guarantee KS funds?

Because numbnuts would think it was a guarantee that you can't lose money in an asset bubble.

Yeah, that's fine Pragmatist. More than happy for you to stick with one provider; however, non trusting sods such as myself would like to minimise risk factors so why shouldn't I be allowed to have two providers?

Because it blows the complexity and cost of administering the system out of the water. One IRD number, one kiwisaver provider is simple. Why can't you just invest your money elsewhere in any of the existing funds outside of kiwisaver?

Yes, agreed, and we could all just use a POSB account only (if you can remember those)
Cheers. :)

Two words answer to your question Pragmatist. They are "Bernie Madoff" - Your question was -- Perhaps you could give me one scenario where being diversified between providers actually is a good idea? Because I can't think of one.
Sooner or later some provider is really going to criminally screw up Pragmatist. Better not to be chained to just one.

The provider does not hold your money.

And if you don't trust the provider to check out the company they are investing your money in.. stop giving them your money, and take it elsewhere, or avoid kiwisaver altogether.

Sigh

Nothing wrong with keeping the system simple. Like GST, it is one of the good things about the system, it is simple for everybody, Take your money and invest it elsewhere rather than foist extra costs and un-needed complexity on the rest of us.

I joined KS today. Finally got around to it. Was with AMP with an investment fund but fees were whorendous.

Great news
Yes KS fees are lighter (lower management fee for similar investment profile and for most if not all KS funds, no entry/exit fees).
More transparancy regarding performance (e.g. Interst.co and Morningstar) and competition between providers puts a lot of pressure on providers to deliver.

By having to pick one manager you have to like all of what they do and how they manage money in each sector. Personally, I'd rather have my domestic fixed income managed by Milford, with someone like Salt Funds management (via Westpac) managing my equities. I'd potentially opt for passive management in international equities and definitely passive for international bonds. Why don't I get that choice?

Whilst I agree the focus should be getting more people into the right Kiwisaver fund, why am I forced to have the individual sectors managed by the same manager?

You seem quite financially literate. What do you see as the advantages of having your assets split between different KiwiSaver providers, as opposed to having them split between different non-KS fund managers with only the efficient maximum in KS?

The disadvantage is having to have multiple investment relationships to manage. Why should I have to establish a separate managed fund investments to replicate what I would like to do with my Kiwisaver?

I have Kiwisaver... why should I have to overlay that investment with what I would actually like done with the money?

Kiwisaver should be far more flexible, rather than the current setup of a single account with a vanilla fund manager.

We should have a fully portable and splittable system like Australia, where you can put any assets you like in, including things like private equity, commercial property etc.

Everyone complains about people going into default and conservative funds,so imagine the confusion more choice would cause.

Just to clarify here that default is a conservative fund by law and people being unengaged and NOT taking the time to consider and choose a fund that would be right for their future was what all the complaining was about there.

As printer8 pointed out, it is a shame that the lowest common denominator is being used as a reason to drag down everyone, especially since making the option available does not mean that everyone if forced to make a choice, you would just keep the default the way it has always worked.

My Kiwisaver balance sits at 208K currently. I certainly would like the choice to have more than one manager, and can't see if that it is my preference any reason to restrict it. Others might not want to utilise that choice but it's over to them.
I would be happy to see some limit on the number of funds you can belong to - say you have to have 50K plus with every manager before you can can add another.

Is this your entire savings, or have you got other assets in other savings vehicles?