KiwiSaver Now in its Third Year – What are the lessons?

As many commentators have said, KiwiSaver is a no brainer! The incentives have certainly been put in place for all eligible participants to join, albeit some may not be able to spare the minimum 2% of their pay.

Over the first few years of a person joining KiwiSaver, the biggest drivers of investment performance have been the government’s contribution, and that of the employer. If we consider someone on a salary of around $40,000 per annum the minimum contribution from the individual is $800, and from the employer $800. If the individual tops up to $1,040 then they will receive the government’s contribution of $1,040. Once the total holdings get above $25,000 which for someone on $40,000 pa may take close to ten years, the underlying performance of the fund becomes a lot more significant driver of total returns.

Research House Morningstar has recently released the returns for the majority of KiwiSaver funds. If we ignore the default funds, we can see which managers have been most successful at obtaining the most funds flow. In the traditional managed fund industry, it is normally a fund manager who consistently performs in the top quartile who attracts the best funds flow.

With KiwiSaver, other than offerings through the banks, it seems that arguably the most successful manager at attracting funds flow, has amongst the worst investment performance returns. That dubious distinction belongs to Gareth Morgan Investments. Morgan has been a long time critic of Fund Managers and investment advisers. The performance of his funds has been remarkably poor. Within the industry, the suspicion is that to have had such poor performance indicates that they were trying to time the markets. Anyone who has studied investment should know that timing the markets is virtually impossible to achieve!

Looking at published investment returns for KiwiSaver is only academic. The very nature of KiwiSaver is that there are a lot of small contributions that come through from IRD and then there are a couple of large contributions that come in from the Government. Other than the large government contribution and any voluntary contribution from the member, the funds flow in is relatively consistent and growing as more and more people join up to the scheme.

KiwiSaver investors will increasingly be targeted by fund managers to switch to another manager as the value of their accounts increases. We are already seeing marketing to that effect. We will also see some new entrants into the market, and we may see more consolidation amongst the various offerings. Outside of the default funds, we see the pareto principal whereby 20% of the funds will comprise around 80% of the investment monies.

We will also see investors whose KiwiSaver account is inappropriate for them. It may be a real mismatch in terms of investment risk. This should be balanced off by taking into account the total investments that the investor has, and making sure that the investment is appropriate for their needs. This should be reviewed regularly, as investor needs change as their circumstances change.

This will be increasingly important as the value of members holding increases to a significant level, whereby it will have a major impact on the investor’s financial wellbeing as they head into retirement.