Don’t fault the default

IN THE best traditions of ‘‘nana knows best’’, the Government is considering changing KiwiSaver to make sure we make the right investment choices. It shouldn’t.

Given our tendency to blunder into unsuitable financial relationships, blinded by the coy ankle of a promising return, this might seem a strange view. After all, it’s human nature to seek comfort in a great protector when our own frailties seem so obvious.

However, faith can be misplaced. Nana can make mistakes.

The basic idea is that default funds should be reviewed to see whether the system needs a tweak – a sensible move after five years of KiwiSaver. To be fair, the Government has expressed no preferences on what should happen to the default fund system, and its discussion paper published this month is an excellent run-through of the issues.

Default funds exist to ensure those of us who don’t choose a particular KiwiSaver option have our money looked after in a sensible way. As of March this year, of 1.9 million people using KiwiSaver, just over a quarter, 447,274, were invested in one of the default funds.

The total assets in the default funds at the time was $2.9 billion.

How those funds are invested clearly affects a lot of people and a lot of money.

The current arrangement involves five default fund providers – AMP/AXA, ASB Bank, Mercer, OnePath and Tower – who are each contracted to run a default fund for seven years.

The scheme requires them to keep fees low and focus the investment strategy on avoiding losses, which means a conservative asset allocation with 75 to 80 per cent of money invested in fixed interest securities, such as bonds, and 15 to 25 per cent in growth assets, such as shares.

In the five years KiwiSaver has been in existence, the default strategies have produced an average annual return of 4.9 per cent, as measured by Morningstar, with returns varying from 3.8 to 5.6 per cent.

Given KiwiSaver’s role as retirement savings, five years is a short timescale, so the defaults’ performance relative to other investment strategies should be taken with a pinch of salt.

Including salt, the default funds have performed better than moderate, balanced, growth or aggressive fund types on average over the period.

However, investment theory says in the long run the defaulttype strategy will make a lot less money than less conservative strategies, so it is being argued that anyone in default funds for a long time will retire with a smaller nest egg than they could have.

Those making this argument include Mercer, OnePath owner