As at January 31 there were 1,630,114 persons in KiwiSaver.
The total funds under management were $7.38 billion, according to research house Morningstar in their report for the quarter ending December 31, 2010.
Of these total funds $2.625 billion (36%) is in the six default provider funds.
Many contributors are not aware that by law the default funds must hold the majority of their funds in low-risk fixed-interest and cash assets.
The long-term return on these is low.
On the www.sorted.co.nz website you can work out your likely savings over any time period with assumptions that your salary will grow and the average return is a net 3.6%.
For a 20-year-old on a $25,000 salary the system calculates a return of $714,862 for the individual saving 4% and the employer's contribution.
More importantly, due to inflation the $714,862 return will only purchase to the value of $293,234 at today's dollar value.
The average return of 3.6% on the sorted site is realistic long term for the theoretical balanced fund assumption.
The two-year average from the Morningstar report for growth funds was 11% and 14 % for aggressive funds to December 31.
These average figures are high for such a short term and Morningstar do caution that: Volatility in returns is a fundamental characteristic of investing.
Markets ebb and flow. The past three years have taught us that its important to understand the fund you're invested in and not get caught out by short-term factors.
In my example of a 20-year-old the contributor has 45 years to go before they can (in normal circumstances) access their funds.
Over the past seven years Morningstar Research figures show funds managed by the six default providers have averaged around 7% for balanced funds.
If our theoretical 20-year-old moved to a balanced fund with their default provider the return over the 45 years would rise by an average 3% per annum with an end result of an additional estimated $300,000.
If an aggressive or growth fund was selected the return would be greater.
A period of 45 years is sufficient for the volatility in markets to be muted.
In this time period the normal cycles of investment would repeat about six times.
It is possible that contributors to default funds may be pushed into more appropriate funds if the recommendations of the recent Savings Working Group report are adopted.
The emphasis of the report was to get more people to save and particularly into KiwiSaver by auto enrolment of all persons working.
They also suggested that the default funds should be replaced with a single low-cost default scheme investing solely in index-based shares and bonds.
This recommendation will probably be dropped as the current providers will lobby against it, having initially run the funds at a loss and now just beginning to break even.
In my opinion it is more likely that the Government will provide some incentive for those in default funds to seek advice from professional advisers, particularly now that legislation requires advisers to meet ethical and skill standards.
It is noticeable one (not default provider) fund manager has begun advertising to attract default fund users.
If you are in a default fund you should seek professional advice as to whether on not it is appropriate for you.
- Peter Smith is a Certified Financial Planner and is the Principal of Kepler Group Otago Limited, Dunedin. Email: pete@keplergroup.co.nz.
A free disclosure statement is available on request.
