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David Hargreaves says the problem of KiwiSaver funds being effectively under-invested needs fixing quickly

David Hargreaves says the problem of KiwiSaver funds being effectively under-invested needs fixing quickly

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
55+ 548,150
No Information 5,843
Total 2,873,132

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.


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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But what exactly are you proposing, in practical terms?

It is actually already the case that if you are signed up for KiwiSaver YOU have to make active decisions about where your money goes. Some people don't. How do you propose to force them?

Bank writes to youg KiwiSaver member in default fund. They don't answer. Bank writes again. They still don't answer. Bank texts, they don't answer. Bank telephones, they don't engage. Now what?


You can't not have a default fund. You are simply suggesting a different default from the one currently in operation.

The one you are suggesting will be better for some people than is the current approach, and worse for other people. Age is by no means the only factor determining which is the most suitable fund for an individual.

For example, a 20yo who has no intention of touching her KiwiSaver funds until she's 65 is in a different position from one who hopes to withdraw the funds for a house purchase within the next couple of years.

What's more, the more the Government accepts responsibility for making sure that everybody gets a good outcome regardless of whether the individual makes any effort to help themselves or not - the more you discourage people from making any effort to help themselves. That's not a good outcome


This is just a personal opinion, because there is no right way to do this for everyone. But I feel that the First Home withdrawal is the issue not the increasing the risk of the Default Funds. The original point of Kiwisaver is to saver for retirement. Buying a house is not saving for retirement.

I do agree that the emphasis should be on the individual to manage their investment/ improve there financial literacy, but that doesn't mean we can't have an easy default option what will work for 99% of the population for the purpose of saving for retirement.

He's proposing something that was proposed to me once, as an employee of Roslyn Woolen Mills. They were going down the gurgler, so offered us all shares in lieu of part of our wages. Better cash-flow for them, unsecured creditor for us. I left before they fell over but never forgot the lesson - my workmates got stung.

So it is with Kiwisaver and any bet that the future will bigger your money - meaning it will bigger your ability to buy processed parts of the planet, sometime later. That worked in the growth phase, cannot possibly hold over the top of the gaussian, and will be a series of cascading defaults - if not outright collapse - on the downside.

The question is did Cullen know this when he initiated it?

Ms de Meanour

Is this what the banks actually do? Wow.

As a proposal - new enrollments automatically direct their investments into a growth fund - if below age 40. Enrolled people have the option to change this. Just as they do now. Easy.

I don't claim that that is what they do. I am saying that it is impossible to require them to force their customers to make a choice if their customers don't want to.

Your proposal would result in more financial incompetents having their money at higher risk. Do you think that is a good idea?


Why is that a bad idea?

Default new KS members to growth. Allow (the exact opposite of forcing) people to change to conservative, if they want to.

People may want to change to conservative for many reasons, which should be allowed.

Growth = risk. Perhaps I've got a different view to you as to what a responsible Government ought to do, but I don't think Government should be putting people's money at risk without their explicit agreement and understanding.


I agree growth has risk. KS purpose was for retirement. This typically is a long term horizon.

I appreciate some are now using KS to fund housing. This is a different purpose.

I also agree government needs to be explicit and people need to understand risk.

But I wonder whether people are clear about the opportunity costs - outlined by the author.

Every working and lower middle class person I know of sees Kiwisaver as nothing more than a savings account they can clear out when they want to buy a house. Makes sense they have them set to low risk growth strategies.

Me? I have my KS in a high risk growth strategy and there's no way I'd take any money from it to buy a house.

The other thing we don't know is what their portfolio risk looks like, if they are investing other funds then conservative might provide a reasonable overall risk weighting.

When you start telling people that they can't choose their own risk weighting or start trying to force them into taking risk I think you're heading for legal action and substantial fines (rightly so!)

I think house ownership is a great remedy for what is called the "income cliff" at retirement. I see no problem with using KS for house ownership - while continuing with KS after that.
But we also have to get serious about making Kiwisaver adequate. (a) By making sure more than just a percentage are in the scheme, and (b) increasing contributions to the about 15% of income.
And to those who say folk can't afford it, well the reality is they can't afford not to.


So your plan is they will still be renting at age 65 with only national super as income ?


This is why, pragmatically speaking, it makes no good sense for us to be heavily indebting young Kiwis in order for them to be eligible for much of the workforce (where possession of a degree is a basic requirement), in order to allow the older working generations to enjoy lower taxes. And then demanding the young also fund welfare benefits for the old regardless of need. And then demanding those young folk fund their own retirement instead too.

It's out of kilter.

Hence me not begrudging the reduction of fees for young Kiwis.


If rental yields in the area that I choose to live continue to remain low and lower than returns that I can receive on the cash in the bank, or returns achievable elsewhere, then yes.

For example, a one year interest rate in the bank is 3.5% versus 2.0% rental yield in the suburb of Mt Eden in Auckland. If one wants to live in Mt Eden, it is clearly cheaper to rent in Mt Eden than it is to own where you also have further costs of ownership (rates, insurance, & maintenance).

It is all a matter of price and house valuation.

Nobody who relies entirely on national super will be in a position to choose whether to live or to rent in Mt Eden. Likely they will have to live elsewhere.
The real trouble with the percentage return thing is not the rental price but the purchase price of the residence. It's the purchase price that is out of kilter.

Your comment that poor people can't afford not to save would make more sense if there was no New Zealand Superannuation.

If an individual is really so poor that they can't afford to save for their retirement, then New Zealand Superannuation on its current settings will probably be enough to enable them to maintain their current standard of living in retirement.

If KiwiSaver were supposed to enable individuals to live without NZS, then indeed KiwiSaver settings would need to be changed. But that is not the purpose for which KiwiSaver was designed, or for which it is currently intended.

What is Kiwisaver intended for then?

A very excellent question! Here's the official line

"to encourage a long-term savings habit and asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement. KiwiSaver is aimed at increasing individuals' wellbeing and financial independence, particularly in retirement, and to provide retirement benefits"

So if you think about it, neither very poor nor very rich people are in the target group - those who are "not in a position to enjoy standards of living in retirement similar to those in pre-retirement". Very poor people will be able to live just as well, possibly even better, on NZ Super, compared to how they live on their pre-retirement incomes. Very rich people will be just fine anyway.

That leaves people who might otherwise be left with nothing but NZS and for whom that would represent a serious reduction in their standard of living. It's very arguable though whether that is really a public policy problem. NZS ensures you won't starve to death, is it really the Government's problem or responsibility to help you any further?

It all comes back to that IQ thing. Dumb people have been paid to have families for decades now. Meanwhile top achievers flee for higher living standards. Good luck getting kiwis to care about their finances if they don't already.

I find your statement tough going.
You imply that people who may be low IQ have children that are likely to have low IQ.
Research suggests there is no genetic link to genius and i assume the opposite is true, no genetic link to low IQ.
But here is some reading to help.

I thought the trend was for each subsequent generation to have a higher IQ, and the correlation between IQ and wealth is more like weak political rhetoric.

Nice cherry picking. I'm not talking about geniuses here. And even so, a lot of top scientists and writers are Jewish suggesting there is a genetic factor.

Actually IQ heritability is similar to height heritability - there is some reversion to the mean of your ancestors.
If it's easier on your consciousness to you can pretend IQ is entirely a function of environment - in which case the single parent state funded family of six kids watching SkyTV and eating junk food doesn't bode well either. Of course dumb parents don't look after their kids properly - it's a mistake to think environment and genetics are two separate factors.

You might think it's all very unpleasant, but that doesn't change facts. Here is some reading for you Note the 120 citations. Your pop-science blog source only has one reference.

If you really wish to understand this issue, search for (Professor) Jordan Peterson, Sam Harris and IQ on Youtube. Of course, it is important to listen to the views of a range of well informed speakers to best arrive at an educated position. Try to estimate their biases.
I suspect this taboo subject will create major problems for Europe in comng decades if it is ignored. Indeed political correctness will cause immense future problems. Incidentally, I can happily live with the FACT that East Asians are generally smarter than we Caucasians and that Ashkenazi Jews are even smarter again. I suspect millenia of religious persecution is the reason the latter are so highly intelligent.

It's scary that it is too unpalatable to talk about the fact that already 10% of the population are too intellectually impaired to work.
Even more scary that automation/technology is going to compete for work with a further 40% of the population in the next 30 years or so.

And we wonder why economists are pushing for UBI now...

IQ is one factor for success, but EQ might be much more predictive of success. Culture is highly underated and in a broad sense you learn that from your environment.

The average IQ will indeed sink.

Smart people know the planet is overpopulated and limit their reproduction. Dumber people tend to keep on reproducing in ignorance.

The result is lower average and a dumber voter. So in terms of changing society for the better, the longer we wait the less likely it is to happen. Democracy may not work in the Long Emergency.

You really need to get your arguments sorted.
They just contradict themselves.

Smart people don't produce less kids because of overpopulation. They do it due to existing high levels of productivity.
If productivity/technology is high, the requirement for labor decreases to produce a given product. This is a natural corollary.

If your premise was that we are doomed by the limitations of fossil fuels, smart people would be reproducing at much higher rates. i.e. they would realise that future productivity was decreasing and thus be more predisposed to higher levels of procreation in order to maintain a given level of return from their offspring.

It's not that dumb people procreate for no reason. It is that they have to supplement their low levels of human capital with higher levels of labor.
It's exactly the case we see in the undeveloped world - offspring produce a return. We also see the phenomenon almost universally in the rural versus city environments.

Essentially...If you are still using an ox driven plow, you are going to need more labor than the farmer next door who uses a tractor.

Your comments are interesting - in that they show two things - one is that if you start with a flawed premise, all your empitiral thought will be flawed, or at least runs the chance of. The second is that this is probably why empires and local upwellings have all fallen over. They too must have not grasped the problem.

We are an energy equation - as is our society. We only were able to specialise due to the input of fossil energy, about 200 years ago. Even so, both before and after that change, we have overpopulated and fought about it. Lebensraum fur herrenvolk being a classic, Rwanda being another. Note that both have been described as something other than too many people and not enough resources.

So it's not higher levels of labour needed - that only makes it worse. Can you not see that? It's more acres per person is the true wealth. Which requires less people.

They too must have not grasped the problem.
Well thank god we have Gail Tverberg and her groupies to show us the way. All us economists with advanced degrees might as well just burn them right now.

We only were able to specialise due to the input of fossil energy, about 200 years ago.
That's just fundamentally not true.
Cities and technology fostered specialisation. Not Fossil Fuels. Technology and FF are endogenous - You cannot arbitrarily chose the direction of causation (which is what you do).
Technology (which includes fossil fuel usage) is what made the widespread specialisation that we see today possible.

Technology without energy does exactly nothing. Zilch. Your double-overhead-cam fuel-injected computer-controlled vehicle runs to a permanent halt on an empty tank - the same way a Model T did. It's the energy you need. It's the energy you can't do without. Try using your microwave but not eating. I'll cook over a fire but I'll eat something. Let's see if my energy ingestion beats your superior technology.

We used to spend most of our time finding/growing food, creating shelter and not much else. Mostly solar-energy derived - plants, firewood. Then fossil fuels relieved us of that time-demand (though we had fights as to who woud share the excess) and we did all kinds of other things because someone else was putting our food on the supermarket shelves.

But fossil fuels are fossilised sunlight. A finite historical store of it. And we've burnt the best - it was gone before you and I were born. We're down to the dregs, in energy-return on energy-invested terms. Think of it as sunlit acreage per head.

By 1800, Europeans had spread out around the planet, because Europe was too small for their resource demand. New World ring any bells? Lands of opportunity? NZ and Australia were spread into too. The indigenous folk in all conquered countries were living at or somewhere near a sustainable person/acre ratio. But the Europeans saw the lands as empty. An arrogance and a fatal mistake.

Then came Fossil Fuels - which we can think of as extra sunlit acres. Down acres, to steal a phrase. And on the one-off basis of those down-acres, we increased from 1 billion to 7 and climbing.Currently each calorie of food takes between 10 and 27 calories of fossil fuel to deliver it. That's not sustainable.

Sustainable population depends on consumption rates, but probably it's 1 billion long term at our level, 2 billion at peasant level, and if we overshoot and collapse, there may well be less than the billion anyway.

But of course, all it needs is money and technology. Silly me. I'll stuff my pockets with dollars and start driving my fuel-injected corolla immediately, suitably chastened and abashed. I'll go forever, right?

BTW - if you paid for an advanced degree that taught you what you seem to think, why not challenge them and demand your money back.

Better still, put me in touch with the Prof who mentored you, and I'll challenge him/her to a debate.

Bet they run a mile :)

They wouldn't run a mile.
They're very stubborn, short sighted people. Much like yourself.
Their one difference - they operate in a world where they have to prove things. A few spurious correlations by Gail Tverberg and no structural reasoning doesn't really cut it for them.

Economsits prove things?

Where have they been the last ten years?

All I see is bewilderment, claims that this programme will resume shortly, and repetitive mantra-chanting. We have reached a denouement - the time where a finite planet cannot underwrite exponential growth. Economics can indeed chart this, if it somehow disengages real supplies (tonnes, petajoules) from floating dollars, debt-backed GDP,s, unrepayable forward bets and the rest of the hocus.

But you'd have to understand that at no price-point can you put 200 scientists into a room, pay them a million bucks each, and expect them to create a ham sandwich (not my analogy, but it'll do). That needs real pigs, real paddocks, real sunlit area growing the wheat and the real food for the pigs.

Note it's not an economist doing the tabulating or the predicting. They might, possibly, have a stab at the 'price' of pork in 60 years, but the changed parameter (starving population) so overrides the picture that their guess would be meaningless. The best economists would come up with is that a certain price-point we'd all eat chicken instead - a conclusion which misses the underlying problem - universal soil degradation, which presumably affects chickens too.

So many spelling errors...

Economsits prove things?

Well. Yes. Anyone with any intellectual rigor doesn't live in Gail Tverberg's fairy world.

I think you, like many, suffer from superiority complexes when faced with things you don't understand. A yeller when the discussions starts off as a whisper, so to speak.
The fact of the matter is that you would easily find answers you seek by reading (and understanding) some of economics and multidisciplinary literature on these very things you argue about.
Are some of your premises correct? Yes.
However...The lack of mechanical understanding misdirects you to poor conclusions.

if you start with a flawed premise, all your empitiral thought will be flawed, or at least runs the chance of

O that is so very, very true

I'm guessing someone has continued to avoid doing any homework which might alter someones pov?

here's an oldie but a goodie:

Ok, here is an extract from that reference that may be relevant to your claim

One critical piece of evidence is that siblings of persons with severe intellectual disability have an average intelligence quotient (IQ) near 100 whereas siblings of persons with mild intellectual disability have an average IQ of about 85, about one standard deviation below the population mean. The absence of genetic links between severe intellectual disability and normal variation in intelligence fits with current molecular genetic research


See below

See my comment below

Oh, and by the way what sector of the workforce do you regard as dumb?
You imply its anyone unemployable, on benefits, where do you class the workers of a sheltered workshop?
They are severely handicapped and your reference suggest they could have children with an IQ of 100 who could become bank managers...

There are a variety of opinions in the comments but the bank cash conservative funds should go as default funds for those joining Kiwisaver unless they have 5 or less years to retirement.

The apathy problem for younger Kiwisaver members is going to be a perpetual problem. They aren't close enough to retirement to care, they'll leave it on autopilot as they are busy with other stuff in their life, and they are resistant to being educated because it takes mental effort.

How safe is a default fund compared to a growth fund in a GFC.?


Somewhere on interest there is a graph that shows this. It took quite a while for the growth funds to over take conservative after 2008.

The sharemarket recovery commencing March 2009 was incredibly strong. What you are probably thinking of is the affect of a one-off fall in interest rates boosting bond earnings. If you were in growth or aggressive before 2008 through to the present you were much better off.
The term “Conservative” itself is misleading. If you are holding funds in the long term there is nothing surer than that value will be eroded by inflation. Even when nearing retirement, money you are investing or earning from past investments in a fund may not be spent for 30 years and growth or aggressive settings are essential to preserve relative value. And don’t get me started on the management fees funds for invested in Conservative settings - basically the same costs banks have to manage term deposits.

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.

If people were to move this all money into more risk orientated funds - the people gaining most tangible benefit would be the financial adviser profession. Any risk orientated positions taken by our local financial advisers would massively benefit from an influx of $4+ billion new investor capital.

Hence the article?


NZ financial advisers direct funds towards investments in good performing local asset classes. Kiwisaver growth plans direct Kiwisaver funds into good performing local asset classes. If $4billion in new funds get dumped into the same asset classes as those picked by our local financial advisers, these people will look like geniuses and make a killing.

And I'm one of the Billy-Goats Gruff.

David, I'm glad you made the point about it being reasonable to be in a conservative fund, if you are nearing retirement.
That is why I switched from a Growth fund to a Conservative fund earlier this year.
I will be 65 in 12 months time, and I want to be reasonably sure my fund will be $Xk +/- 5%, rather than $Xk +/- 15%.
Mind you, after I have taken some of the money out, I will probably split the remainder between Conservative and Growth. Or does Balanced make more sense?

Depending on your provider Balanced might actually be 50/50 split of Growth and Conservative, so effectively the same thing. If so, Balanced would make more sense just to keep life simple.

Prior to retirement it's a good idea to move to a more balanced ratio of equities to fixed interest. This helps avoid sequence of returns risk. And, helps you sleep at night.

Once retired, a further strategy is to increase your holdings of equities, gradually. Michael Kitces and Wade Pfau have some pretty good insights on this.

Definitely a Hmmm from me Hmmmm.

It should depend on when you’ll spend the investment. For example, I’m 60 but don’t expect to spend the majority of my investments any time in the next 20 years. At no time in the last 100 years, including two world wars, a Great Depression and the GFC has it been a better idea to invest in fixed interest compared to shares for that long.

Well with respect, research by Bill Bengen, Wade Pfau and Michael Kitces have led me to interpret things differently. I understand that fixed interest returns less than equities over a long horizon. Example S&p 500, which has returned around 10 per cent each year. If you’re taking 30 year periods there has been a greater likelihood of increased wealth through equities than through fixed returns. This is drawn over the period through two world wars, and several depressions.

Retirement researchers (those above listed) have identified that having a 50 per cent weighting of equities really helps your portfolio. But they caution that you want to take a maximum drawdown of under 4 per cent. Research is now going into variable rates - how much can you draw with a really high CAPE, as we currently have.

If you're going to direct people to invest somewhere, do you assume responsibility for the outcome?


People are currently directed to conservative. Does govt take responsibility for providing all the gains people have foregone by being in default Conservative?

So "We say you have to assume morerisk. But it's not our fault if it ends badly" is OK then?

There's a difference between income foregone and capital lost.


It's totally disingenuous to claim that Conservative default schemes are a self-serving move by banks to enhance revenue. They'd make a lot more money if the funds were in higher risk, higher fee growth products.

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