Doubts on bank's push for 'life stages' KiwiSaver

A retirement savings advocate is sceptical of suggestions that young KiwiSavers should take on more risk by default.

The country's largest KiwiSaver provider, ANZ New Zealand, released research yesterday indicating that a 25-year-old KiwiSaver investor could face an aggregate shortfall of $72,000 over 40 years by staying in a "conservative" fund – the one designated if an investor does not nominate a preferred fund.

That equates to around $14 billion in retirement savings across the nation's young KiwiSaver investing public, said ANZ.

The Australian-owned bank, which owns the OnePath KiwiSaver provider with around $2.3 billion worth of funds under management, believed changing the default fund to one which gradually alters an investor's risk profile over their lifetime would provide better returns in the long run.

ANZ's head of wealth management, John Body, held talks with Finance Minister Bill English and Revenue Minister Peter Dunne yesterday about changing the default fund.

The bank advocates a "life stages" investment strategy as a default option: a programme where a young investor starts in a "growth" fund and progresses through "balanced" funds to a purely "conservative" fund from age 60 through to retirement at 65.

ANZ's own research showed a typical 25-year-old investor starting out on a salary of $36,000 and contributing about $140,000 to a "conservative" KiwiSaver fund over the following 40 years would end up with a final balance of $248,000 compared with an estimated $320,000 through a "life stages" approach.

Fees paid to ANZ to manage the investment funds were about 0.2 per cent higher for "growth" funds [0.73 per cent] than for "conservative" funds [0.52 per cent].

But Retirement Commissioner Diana Crossan said the original concept of a default fund did not envisage something investors would remain with for their whole working life.

"My understanding was that it was set up so that people would go into a default fund and then work with their provider or adviser or Sorted.co.nz, or whoever, and sort out what they wanted," Crossan said. "I'd be much happier if we could find a way of getting people to make a decision to go into a `life stages' approach [on their own].

"I'd be hoping that the provider would be talking to them more.

"I know it's costly and the cost of talking to your low-income KiwiSaver customer doesn't make money for the providers, but I was hoping they would find ways of talking to their customers and giving them information."

Crossan also said nominating a "life stages" approach as the default scheme ignored the fact that every investor had different goals.

That sentiment was echoed by Westpac's head of investment solutions Matthew Goldsack who said that although he welcomed debate on better serving investors, the "life stages" approach was not suited to everyone.

For example, young KiwiSavers using their contributions to save for their first home would be better served by a conservative fund.

Conservative fund investors had also been able to avoid much of the market turmoil over the past four years, said Goldsack.

Massey University Centre for Financial Services and Markets director David Tripe said that better savings outcomes from a more rewarding default fund might encourage greater financial literacy itself. A 2011 UMR Research survey suggested more than a quarter of KiwiSaver members did not know if they were in a conservative, balanced or aggressive fund – and many wrongly thought funds were Government-run.

But of the 88,000 people enrolled in default funds in 2010, just 16,000 switched into a fund they had chosen themselves.

- © Fairfax NZ News