Embed with KiwiSaver

Thanks to New Zealand's best-loved finance writer, Mary Holm, I no longer have to scour the entire Capital Markets Taskforce (CMT) Report looking for the bits that interest me - professionally, that is.

Holm, who was a member of the CMT, kindly forwarded me a few paragraphs from the group's report suggesting some fundamental changes to the way KiwiSaver default schemes are structured.

According to the report, the government will issue a new tender for KiwiSaver providers in 2014 - I should've known that but I didn't.

"We recommend that when this happens, the default investment mandate should be changed to better suit long-run investment needs," the CMT report says.

Under the current rules, the six default schemes (run by AMP, Mercer, ING, AXA, Tower and ASB) must follow a very conservative investment strategy with the funds only allowed to invest up to about 20 per cent into 'risky' assets such as equities.

With about half of all KiwiSavers enrolled in default schemes - according to the Government Actuary - it's likely that many members are playing it too safe by the standards of investment theory.

The general thrust of traditional investment thinking is that the further you are from retirement, the higher the proportion of your savings should be in equities.

So the structure of the current default funds really represents the end point of a retirement savings strategy.

The CMT suggests one solution could be to change default funds to "balanced" mode, which I recall means 60 per cent in equities and 40 per cent in bonds/cash (or maybe it's the other way around).

But the Taskforce also floats a more interesting idea of converting KiwiSaver default schemes to "lifecycle" funds where the asset mix adjusts to match a member's age.

Lifecycle funds, which are becoming popular in the US, essentially embed what investment professionals think is best for you inside the product: it is the investment advice you get when you're not getting investment advice.

Holm has profiled a few KiwiSaver schemes that already do lifecycling in her book 'The complete KiwiSaver'.

"There are several of them, not well known," Holm says.

One such low-profile provider I spoke to recently was the Supereasy KiwiSaver scheme - run by local government superannuation and insurance firm Civic Assurance - which rebalances each members' portfolios monthly (annual is normal) if they select its Automatic Fund option.

I won't bore you, or myself, with the details of this extraordinary monthly administrative feat but rest-assured it is a super-hard thing to get right.

David Chaplin