Members should reassess which level of risk will help them achieve their goal
Kiwisaver has proved to be a huge success, far beyond the Government's expectations.
At the end of March the scheme had a phenomenal 1,369,609 members, net of opt outs and closures, compared with the Treasury's projections of 680,000 members by June 2014.
KiwiSaver is a success partly because of the
Crown and employer contributions.
At the end of March a total of $5.29 billion had been distributed to fund managers with 43.1 per cent of this provided by the Government, 16.9 per cent by employers and 40.0 per cent by individuals.
Any scheme where the average member contributes only 40 cents of every 100 cents that goes into his or her account is bound to be a success.
The Crown's initial $1000 contribution will become less and less relevant as the scheme grows but KiwiSaver should remain popular because members clearly see its benefits even though it was launched at the beginning of the world's worst financial crisis since the Great Depression.
Now that the first stage is over it is important that members continue to assess which is the best scheme for them because this decision will have a big bearing on the lump sum they will receive when they reach 65.
For example, a KiwiSaver member with a starting salary of $30,000 that increases by 2.5 per cent per annum - and where the individual and employer contribution is set at 2 per cent of the annual salary - will have the following lump sums after 30 years:
* $112,500, assuming an annual return of 2.5 per cent per annum after tax and fees
* $165,900 at 5 per cent per annum
* $252,700 at 7.5 per cent per annum
* $395,700 at 10 per cent per annum
The objective of every investor, as far as this example is concerned, is to achieve the $395,700 lump sum target, instead of $112,500, without taking undue risks.
How many of the 1,369,609 members really understand the options available to them and the best way to maximise their total return on a post-tax and after-fees basis?
The good news is that the largest KiwiSaver funds, which are listed in the accompanying table, have protected investors from the worst of the world economic crisis.
ASB is the largest KiwiSaver provider with total funds of $974 million at the end of March and it also has the largest fund, the ASB KiwiSaver Conservative (Default) Fund which has total assets of $559 million.
(The IRD randomly selects one of the six default providers - ASB, AMP, AXA, ING, Mercer or Tower - for KiwiSaver investors who do not choose one themselves. If investors do not pick a particular fund then their money is invested in the default fund of their default provider.)
The country's largest KiwiSaver fund has done well during a difficult period with the unit price rising from $1.00 on October 1, 2007 to $1.11 on March 31, 2010 while the benchmark NZX50 Gross Index fell by 23.7 per cent over the same period.
The ASB default fund had return of 4.4 per cent per annum - after fees, but before tax - between October 2007 and March 2010.
Although ASB's largest fund performed well during a difficult period it is highly unlikely to achieve an after tax return approaching 10 per cent per annum over a long time period.
This assessment is based on its conservative asset mix, which is as follows at present;
* Cash: 25 per cent
* NZ fixed interest: 25 per cent
* Global fixed interest: 30 per cent
* Australasian shares: 9 per cent
* Global shares: 11 per cent.
The fund's current benchmark is 20 per cent in growth assets with the remaining 80 per cent in income securities.
Tax is a major issue regarding conservative funds because interest is taxable whereas capital gains on shares, particularly New Zealand shares, are not and most New Zealand companies pay fully imputed dividends.
Thus a 12 per cent return after fees, but before tax, on both a NZ income and NZ equity fund don't produce the same result on an after tax basis. The after tax return on the equity fund should be close to 12 per cent whereas the after tax return on the income fund will be lower.
In other words KiwiSaver funds, with a bias towards income assets should produce lower returns on a long term basis, particularly on an after tax basis, compared with NZ equity funds.
Nevertheless $2.22 billion of the $3.97 billion held by the seven top KiwiSaver providers are in their main conservative fund with only $0.56 billion, or 14 per cent, in growth funds.
New Zealand investors don't seem to pay much attention to tax when choosing their KiwiSaver fund because Reserve Bank figures show that only 14 per cent of the scheme's total funds are in NZ equities, 39 per cent in domestic income securities and 47 per cent offshore.
A number of individuals, including fellow Weekend Herald contributor Mary Holm, suggest that passive funds are the best option because of their low-fee structure.
Smartshares, which is owned by the NZX, is the main provider of KiwiSaver passive funds and its performance has lagged well behind its competitors.
The latest unit price for its conservative fund is $1.07, below the price of all the funds included in our table.
The unit price of Smartshares growth fund was only $0.76 at the end of March.
The unit prices of all the growth funds managed by the six largest KiwiSaver providers are higher than Smartshares' $0.76.
Fees are important but they are less material than manager performance and tax, particularly as fees are tax deductable.
KiwiSaver investors, particularly those with a long time-horizon, need to be more adventurous and consider a switch from conservative to balanced funds or actively managed growth funds.
Well-managed balanced funds have a better chance of achieving annual growth rates in excess of 5 per cent because they contain more growth assets. The asset mix of the ASB KiwiSaver Balanced Fund is as follows:
* Cash 5 per cent
* NZ fixed interest 16 per cent
* World fixed interest 19 per cent
* Property 10 per cent
* Australasian shares 20 per cent
* World shares 30 per cent
The balanced approach has more risk but should generate higher returns than conservative funds, particularly over the longer term.
The performance of conservative funds over the past two-and-a-half years is probably as good as it gets because they have a small exposure to growth assets.
But where do the 1,369,609 KiwiSaver members go to in order to obtain the best advice as to which fund they should be in?
The Government has launched a great scheme but the financial advisory sector has been devastated by the finance company debacle and there will be fewer and fewer of them in the years ahead because of stricter rules and regulations.
As a result too many KiwiSaver investors will probably stay in conservative funds when they could obtain higher returns, and a larger retirement lump sum payment, in more-growth orientated funds.
* Disclosure of interest; Brian Gaynor is an executive director of Milford Asset Management, which is a registered KiwiSaver provider. He also manages the Milford KiwiSaver Aggressive Fund.
