KiwiSaver - performance and upcoming changes
A year ago we were just poking our heads back into society and wondering what it would look like post-Covid-19 lockdowns. What was the new normal in terms of socialising, exercising, commuting, shopping, schooling and work conditions. Those were the concerns at a personal level and they cut across our local communities.
Economically there was a great deal of uncertainty at a worldwide macro level with Covid-19 cases continuing to explode. The long-term effect this would have on trade, manufacturing and major industries such as tourism was indeterminable. At a local level, there was an air of caution and expectation that financially we were still to see the worst with predicted business closures and rising unemployment.
To help ease this uncertainty Reserve Banks around the world began printing money and subsidising just about anything that moved or breathed. Along with the vast increase in money, interest rates were slashed to the bare minimum (in some countries 0%). The combination of both of these actions has seen a massive spike in assets values here in New Zealand most notably in house prices. Share markets around the world have hit all-time highs despite the size of the economies in most countries has shrunk. The tricky part for most governments is about deciding when to end the increased supply of money and increase interest rates. Inflation concerns are starting to rise and this may well be the catalyst.
What's this got to do with my KiwiSaver you may well ask? Well, those increased asset prices have had a significant effect on your KiwiSaver balance over the last 12 months to 31 March 2021. The average 12-month return (before tax and after fees) for a Balanced Fund was 21.3%. If you are in a Growth Fund it was 29.4%. Some Aggressive Funds and Specialist Funds topped 40%.
So provided you didn't run for the hills back in early 2020 when markets were off over 20% and transferred to Conservative or Cash Funds then you will have had a stellar year towards your retirement savings.
The lesson to be learned is that if you have set your investment goals correctly and invested where your risk profile dictates then maintaining a long-term view should help you prevail over short-term conditions and reversals.
The other failing investors are prone to is chasing the best performance of the previous 12 months. With investment returns ranging from 12.7% to 29.2% (average 21.3%) for Balanced Funds it easy to be swayed by fund manager promotions. Given the nature of the investment is long-term (retirement), focussing on well-performing managers over a greater period is likely to produce a better more consistent outcome. With KiwiSaver commencing in 2008 we now have a host of funds that have 10-year performance to measure. The range of performance for 10 years is 6.3% to 10.8% (average 8.2%). These are the annualised returns over the 10-year period ending 31 March 2021.
A Fund Manager producing 2% per annum better performance than their peers over 10 years is a better position than a one year variance of 8%.
If you want to know the power of investing it's interesting to note that for the majority of KiwiSaver members who have been contributors for over 10 years in a Balanced Fund their personal contributions make up approximately 25-30% of their total account balance. Employer and Government contributions make up a similar amount and the investment return equates to somewhere around 40%-50%.
In May the Government announced changes to Default Providers and Default Member Accounts. A Default Provider is a selected KiwiSaver Manager who is allocated new members who are automatically enrolled. Someone who starts a new job and does not have a KiwiSaver account is automatically enrolled. There are some 380,000 New Zealanders who have Default KiwiSaver accounts.
The list of Default Providers will be reduced from nine to six. The six were not all part of the nine so there are some new managers in the mix. On 1 December 2021 all those members with a Default account will be redistributed across the 6 managers. The big change is that Default accounts were previously invested in Conservative Funds. They will be invested in Balanced Funds. With the reallocation of assets, there is expected to be a further $1.3 billion invested in share markets with approximately $400 million to find a home in the New Zealand share market.
While for the vast majority of readers these changes won't affect you personally as you probably have chosen your KiwiSaver manager. It may affect you if you hire new staff and they are enrolled in KiwiSaver automatically should they not have an existing account.