By David Hargreaves
The debate that has been prompted by the actions of a group of financial advisers this week around KiwiSaver default schemes is really one we should NOT be having over 10 years after KiwiSaver launched.
Quite simply, somebody should have fixed this a long time before now. In the meantime, around $4.6 billion of valuable nest egg money is languishing in low interest bearing deposits gathering cobwebs - with the only people gaining tangible benefit being the banks.
The fact that University of Auckland academics have now put their weight behind the issue and that now New Zealand's biggest bank (and a default KiwiSaver scheme provider) ANZ has come out too in support of change suggests that there will now indeed be an overdue change. Let's see. Let's see what happens. But as I say again, we shouldn't be needing to discuss this now.
It's not quite a week since I wrote a column bemoaning the lack of knowledge in this country - still - of two related investment factors, namely risk-reward and diversification.
The debate around KiwiSaver default schemes - or more specifically, the requirement that new default savers be placed in 'conservative' funds - just serves to highlight once again that for some people the risk/reward and diversification concepts are foreign language. Why else might a 20-year old allow the money that's deducted from their income at source and intended for their retirement to languish on really low returns?
What's missing, certainly from the information I've seen is the age groupings of the 450,000 or so people who are invested in conservative funds. That's obviously a salient point because, yes, if you are going to retire in a few years then you don't want to see your savings smacked by a global financial markets Armageddon. Conservative for you is a good idea.
As a matter of interest below is the breakdown by age of all active KiwiSaver members, with the information drawn from the official Kiwisaver web site.
|Number of active/provisional KiwiSaver members, by age|
|Age Band||Number as of June 2018|
|0 - 17||319,619|
|18 - 24||380,013|
|25 - 34||629,779|
|35 - 44||497,292|
|45 - 54||492,436|
It's of great interest to me that over 1.3 million members - so just under half of the total - are under the age of 35. So, if you assume that they won't retire till 65 (and let's face it the retirement age is very much more likely to go up than down) then the oldest people among that 1.3 million still have 30 years left to work.
The point about saying that is they can afford to take a fair degree of risk with at least a portion of their money - for a while anyway - in order to make good returns.
Heck, you could have even thrown some KiwiSaver money into cryptocurrencies last year (which would have been fine if members didn't give themselves heart palpitations by looking at the violent up and down moves on a daily basis). The fact is anybody who climbed into cryptocurrencies last year stood to do very well - providing they got out.
That's an extreme and perhaps slightly flippant example but it is an example nevertheless of the fact that in terms of risk - well, you can afford to take a fair bit if your timeframe is very long.
But again, I fear that so many people are missing this basic concept. They go with the idea that it is somehow prudent to get a 3.5% return for years because you won't LOSE money. No. But by the time the fees and inflation have nibbled, you won't make a hell of a lot either.
If people want to be in a conservative fund then that should be an active choice they make. And it's true, as well as the looming retirement example mentioned above, you can also look at young couples who may be looking to divert KiwiSaver funds into a house. Yes, I do have some problems with the putting of the future on the house in that way - but people are doing it and they will do it and in their case it stands to reason that they want to make sure they can't lose any savings in the short run.
We need though to sort this out.
There must be a good portion of those 450,000 people currently earning peanuts on their hard-earned cash that simply should not be there. They are wrongly invested. They are being undersold. This is the future of this country we are talking about here. We want our people to be as well-off and comfortable as they can be in retirement.
I'm afraid you have to suspect that, particularly the banks who are KiwiSaver providers, have been happy enough to just quietly let this situation carry on. As beneficiary of both management fees and of funds invested into their banks they are undoubtedly in an uncomfortably conflicted position.
Now that the discussion is out in the open presumably they will be more than amenable to changes.
What changes then would be desirable?
I would actually go further than the financial advisers' suggestions in some respects.
I think people should be forced, legally to switch out of a default fund within six months of being signed up. I would also suggest that unless they are specifically intending to put money toward a house in the foreseeable future that no people under the age of 40 be put into conservative funds.
Look, some people have obviously gone into KiwiSaver in a very passive way. They've not bothered to understand it. They get signed up. Their money goes away somewhere and then they see a slowly climbing balance (it's climbing slowly because they are in a conservative fund).
It goes back to the whole thing I was talking about last week of getting New Zealanders much more savvy in terms of - not just money or savings management - but actual investment nous. And I think we might have to be a bit cruel to be kind here and say, alright, if you are signed up for KiwiSaver YOU have to make active decisions about where your money goes.
In that sense KiwiSaver could offer up a better example, a better tutorial if you will, than any school or after-school theoretical lesson might.
Yes, that's right, people from a young age could 'cut their teeth' on investment by making their KiwiSaver contributions really work, and doing that by taking an active role in the way their money is invested. Now, the KiwiSaver providers might in truth not be thrilled by that but, it seems this has all been rather easy money for them. Perhaps they need to sing a little more enthusiastically for their suppers here.
Either way, let's see this matter pursued with urgency. It should have been fixed before now. Okay, then. Let's fix it now.