The Morningstar research report for KiwiSaver returns to December 31, 2011 make interesting reading.
With the fifth anniversary of KiwiSaver coming up in July this year, the results show that 34% of the total $10.2 billion in KiwiSaver is still in default options.
Default options have only a maximum of growth assets (shares and property) of 20%.
The three-year average annual returns on default funds was 6.2% compared to 7.3% for growth funds and 7.5% for aggressive funds. Growth funds have an average of 66% in growth assets and aggressive funds have an average of 88% in growth assets. These results are for a short time period but it is beginning to show that longer term, the more growth assets in a fund, the more satisfactory the return.
A recent press release from ANZ said research by ANZ Wealth and OnePath - the country's largest KiwiSaver funds manager - estimates that under the current default settings, about 191,000 New Zealanders could potentially face a shortfall of $72,000 each in their final account balance, when they turn 65. This compares with the final balance an average member could experience after 40 years with an investment strategy that changes as the circumstances of their lives change.
This "life stages" investment strategy sometimes called the "Lifetimes Option" gradually adjusts an investor's fund allocation from growth-oriented assets to income-orientated assets, based on each individual's length of time to the retirement age.
What ANZ/OnePath is badgering the Government about is that there should be an automatic adjustment in default funds where the age of the investor is taken into account when investing in KiwiSaver. The lifetimes options would change at different age bands, as the investor aged.
The ANZ press release showed their calculations of a 25-year-old on a salary of $36,000 saving 2% and 2% from his employer would, in a default fund, receive $248,000 at age 65. Their life stages option changing the asset mix as the person aged would accumulate another $72,000 to $320,000 in total. (Assuming 2.5% inflation and average wage increase over 40 years).
What this says is that a young person starting out in KiwiSaver has time on their hands to ride out the volatility of markets so should make an informed decision to be in a growth fund.
Older persons joining should look at the mix provided by fund managers in the multisector funds based on the percentage in growth assets. Typically, a 50-year-old should consider a fund with 50/50 in growth assets and fixed interest and cash, and a 60-year-old 35/65 growth-fixed interest.
You can have mixed sectors in many KiwiSaver accounts and some investors have small portions in aggressive funds. The single-sector funds in international shares have been the poorest performers over the past four years, at minus 5%.
If you have not yet joined KiwiSaver then consider your options carefully. A default fund may not be the best option. If already a KiwiSaver investor, check out your provider's options. Providers do not provide advice over the phone but they can direct you to an authorised financial adviser who can guide you through the options.
• Peter Smith is an authorised financial adviser and a certified financial planner and is the principal of Kepler Group Otago Limited, Dunedin. Email: pete@keplergroup.co.nz . A disclosure statement is available on request and free of charge.
