In 2007, then Labour finance minister Sir Michael Cullen rolled out KiwiSaver, a mass savings vehicle to drive a savings culture among New Zealanders. Today, three million Kiwis have built a combined nest egg of $57 billion, being managed by 30 KiwiSaver providers. But are we saving enough? Brent Melville spoke to investment experts to find out.
Einstein reportedly referred to compound interest as the "eighth wonder of the world".
"He who understands it, earns it. He who doesn’t, pays it."
The problem is that New Zealand investors are a timid lot.
Most of our investments and savings are in defensive assets, for example cash and fixed income and we tend to put a lot of stock into property, says Bradley Nuttall Otago financial adviser John Alexander.
In line with this "tread softly" approach to investing, comes a common misunderstanding of how KiwiSaver actually works, he says.
"KiwiSaver is really our only mass market investment option and most people just wallow through it."
"Most people have left their money in low-risk portfolios which tells me it just hasn’t been properly promoted, and people are largely disengaged from their funds."
He said it cost us as savers.
"If they don’t see it they don’t worry about it. People have worked out how to live on what is left of their salary after tax, KiwiSaver and other salary deductions.
"But when there is a decision to be consciously made, for example when someone moves over to being self-employed, a lot of the time putting money away for retirement goes by the wayside."
He said in a general sense, most New Zealanders should have more global and equity exposure, and less cash and fixed interest.
"People need to better educate themselves as to the importance of KiwiSaver to any investment mix.
"We would certainly try to work KiwiSaver into an individual’s overall portfolio, and in many cases after discussion with clients, they realise they want to shift into a different profile fund.
At high level, investors have a choice of investing in growth, balanced or conservative funds. "Which option you take should be based on a few variables, for example your life stage or level of risk you are willing to take."
Polson Higgs director and senior adviser Rhodes Donald said a general growth fund weighting, for example, might be an 80/20 mix of growth/defensive investments.
This might equate to about 60% in international and emerging markets, 20% in the Australian and New Zealand share market and 20% in defensive instruments — fixed interest and cash.
But, he said, if you adopted an active approach to KiwiSaver, it was not necessarily prudent to shift into different funds simply because of "perceived performance".
"It is an old adage, but investors need to remember that past performance is no guarantee of future performance, so it is really better to get some solid advice first and understand where you want to be."
Wealth management adviser Lisa Parata said another emerging issue was the preference into investing with a social conscience.
"More people are opting into socially desirable funds, ones for example that filter out investments on the basis of ethical considerations such as gambling, so that could be a consideration when you are looking for a provider."
Mr Alexander said, at grassroots level there was little education around explaining KiwiSaver options and the multiple layers of providers made it all the more confusing.
"Anybody can promote it, but banks, advisers and others are limited to around 25 basis points as a fee, so there tends to be little advice in the market and people leave their money in positions that may not suit them."
Mr Donald agreed that while major distributors like AMP and Booster had done a great job and the automatic enrolling has been a good system, there should have been more provision for advice when KiwiSaver was rolled out.
"The banks have call centres, but these are not utilised well. So there is a basic misunderstanding of how KiwiSaver works.
You wouldn’t go into Australia superannuation without getting advice, he said.
"Government invested upfront in the scheme, so it could have allocated $500 to educate every individual going into KiwiSaver up front and you could have a class of advisers that just gave advice for KiwiSaver."
He said currently there was little commission or fees payable to qualified advisers. For example, default provider Booster paid a commission of 0.25% per year and a $30 finder’s fee.
"In general, however, independent financial advisers don’t actively go out looking for KiwiSaver clients, though it does form part of anybody’s retirement mix."
"I think the most important advice I could give really, would be to ensure you are in it and your kids are in it.
"Investing is a long-term move. The markets will go through fluctuations, but on a 60-year timeline, for example, is where the miracle of compound interest really kicks in."
