Those with large KiwiSaver balances are taking too much risk

Janine Starks is the author of and a financial commentator with expertise in banking, personal finance and funds management.

OPINION: Do you have $50,000 invested in KiwiSaver? These days that’s not an unusual achievement, given the scheme has been around for 15 years. If you’re a full-time older professional, it’s more likely your savings sit in the $100,000 to $200,000 range.

Despite this enviable success, this scares the heck out of me. Why? Because all your money is invested with one manager.

It’s a bit like going into a supermarket and being told you’re only allowed to buy food made by Wattie’s. You’ll survive, but it will raise more than an eyebrow. In New Zealand no single manager has good depth and breadth across their product range. Unfortunately, the government of the day back in 2007, didn’t do the obvious and design KiwiSaver with open architecture (all managers under one roof).

KiwiSaver managers are more like Wattie’s than you realise. Tinned food can be healthy, consistent and it delivers the basics. But surviving on it long-term and saving large amounts for retirement with a tin-can product is risky.

"Single-manager risk is unacceptable. It’s not diversified enough and you’ve missed a whole range of investments that someone with a higher level of savings needs."

Single-manager risk is unacceptable. It’s not diversified enough and you’ve missed a whole range of investments that someone with a higher level of savings needs. Correlation, style bias, manager bias and volatility with limited asset classes or spread are all things the average investor knows little about.

Wrap, supermarket, advice

“Wrap accounts” or “fund supermarkets” are widely available overseas. All managers are on one platform, so you can split your money up.

In New Zealand, KiwiSaver investors who would like a multi-manager approach have three main choices:

  • InvestNow: A platform with 15 fund managers and 38 managed funds known for flexibility with low entry amounts and an online service. There’s no advice.
  • AMP: Access to six managers and 30 funds, often sold via advisers.
  • KiwiWrap: The sophisticated end of the spectrum for high earners who have already built up $50,000 in KiwiSaver. It operates under financial advice and gives access to 400 options of managed funds and single shares.

The KiwiWrap platform is run by Christchurch-based company Consilium and has the highest average balance in the industry ($130,000). Its adviser base is New Zealand-wide and it has an academic and modelled approach to drawdowns (taking income in retirement). Well-known names such as Mint, Fisher Funds, Devon, Pathfinder and Harbour Asset Management appear alongside shares like Warren Buffet’s Berkshire Hathaway, Apple and Tesla.

For those with lower balances who want access to more managers, the InvestNow platform offers some of the same options. AMP’s offering crosses into funds from the big banks.

The seriousness of KiwiSaver flaws

Let me be blunt. KiwiSaver is only a one-stop shop for those on low incomes. Its structure is academically flawed by forcing people to save with one manager and it has failed to provide a decumulation strategy for those who need to drawdown income in retirement.

Our problem is the government in 2007 invented a structure around KiwiSaver that wasn’t based on academic theory. Its goal was to be simple and in that it succeeds. Unfortunately, it exposes people to a host of unnecessary risks and rigidity and doesn’t disclose this.

Additional payments are pointless, beyond 3% (to get employer contributions) and the annual $521 from the government. Investors in-the-know carve payments off into side-funds, where money is retrievable for any reason within five days. It’s known as having liquidity.

If a fund manager designed an investment structure which locked up money for up to 47 years (age 18 to 65) for no reason, we’d be hauled in for mis-selling. If a financial adviser put all their clients’ money into one fund, they could be accused of professional negligence. But when the government dictates these things, it’s OK.

The larger KiwiSaver balances get, the more urgency there is to promote advice. The wrap-plus-advice market is well positioned to avoid the pitfalls.

Some claim it’s a good idea to lock up your money, as it stops you touching it. A fair comment for that percentage of society prone to overspending. But is that you?

By using KiwiSaver beyond its benefits, there are consequences:

  • No choice to retire early.
  • No choice over longer holidays or upgrading a car pre-retirement.
  • No choice in tapping funds for medical conditions that don’t stop you working or where death is not imminent.
  • No choice in going part-time in our final working years, because fund performance allows us the luxury.

These are all things a KiwiSaver manager is forced to decline. Investors who make their additional contributions into liquid funds, go cap-in-hand to no-one.

Recently the Financial Ombudsman, Susan Taylor, made it clear how rigid the KiwiSaver lock-up is. Think closely about your decisions.

Readers should always seek specific independent financial advice appropriate to their own circumstances.


Originally published on Those with large KiwiSaver balances are taking too much risk, Janine Starks, 27 May 2022