KiwiSaver investors' reaction to extreme volatility in the financial markets means more work needs to be done on emphasising the importance of taking a long-term view, says Liam Mason, the Financial Markets Authority's director of regulation.
Financial markets took a huge hit in March as concerns about the Covid-19 pandemic hit home.
"The amount of switching that we saw in March and in the early part of the year tells us that we need to be working with the providers to do more to understand what is driving that behaviour, and to see what we can do to reinforce the long-term view and to help KiwiSaver investors to be more resilient about their risk appetite through the hard times," Mason said.
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Switching activity in the early part of the year was up 54 per cent on the same period last year, Mason told the Herald.
"We saw a lot of money going from growth or balanced funds into conservative or cash funds," he said.
"The indication is that people [were] reacting to seeing markets and their balances go down and worrying about the risks that they were taking," he said. "There is work to do about pushing that long-term message," he said.
The FMA, in its annual report on KiwiSaver, said the scheme proved resilient after facing its biggest test since the Global Financial Crisis.
The scheme continued to grow despite market volatility and economic uncertainty caused by Covid-19.
Total funds under management increased 8.7 per cent to $62 billion, compared to 2019 when total assets grew 17 per cent.
Total membership increased 3.1 per cent to 3 million, the same growth rate as 2019.
Many KiwiSaver funds dipped after a sharp decline in world markets at the beginning of March.
Over the year, KiwiSaver investment returns fell 122 per cent from $3.8 billion to minus $820.9 million, after several years of double-digit growth in investment returns.
But since the end of March, markets have dramatically recovered.
"The report shows that despite the market losses in March that severely affected investment returns during the period, KiwiSaver continued to grow due to the contributions from members and employers," Mason said.
More than $2.5 billion was withdrawn over the year for retirement and first-home purchases.
Mason said although most fund balances grew over the year because of contributions, fees were brought into stark relief because members would have likely seen negative returns for the first time.
The FMA's focus on fees and value for money put providers' investment management styles under the spotlight with an independent report by MyFiduciary.
"The report into active and passive management styles is an important first step in examining the value proposition of providers and the level of fees being charged for the management style they offer. While most funds were found to be 'true to label', the level of 'activeness' varied widely," he said.
Nearly a quarter - 690,000 - of KiwiSaver members remain in default, conservative funds and approximately 380,000 of these members have not made an active choice to stay there.
This year, 43,123 default members made an active decision about their fund, down on the 52,289 in the previous year.
Mason said that although the number of active choices by default members had reduced over the past 12 months, this trend has been improving over the past few years.
"We will be watching with interest to see how these numbers change over the next 12 months while the default providers go through the tender process for new appointments in 2021," Mason said.