KiwiSaver, which now has 1,189,597 contributing members, is a huge success. In addition 239,898 individuals have either opted out or closed their account.

The scheme has been a success because of substantial Government and employer contributions as well as the solid performances of the default funds in difficult market conditions.

A total of $4.25 billion had been transferred by Inland Revenue to investment managers by September 30. The Government contributed $2.07 billion, or 48.8 per cent, employers $690 million, or 16.1 per cent, and individuals $1.49 billion, or 35.1 per cent.

Any scheme where individuals contribute only $35.10 of every $100 deposited in their savings account is a no-brainer - there is a huge incentive to join.

The Government's contribution includes $1.12 billion in the form of the $1000 kick-start incentive. This is a one-off payment but individuals over 18 will continue to receive the annual $1040 tax credit as a cash contribution to their KiwiSaver account as long as they make a similar annual contribution themselves.

The take-up has been well in excess of Treasury forecasts, which predicted 680,000 KiwiSaver members by June 2014. IRD is now forecasting 1,379,000 members by June 2014, more than twice the original Treasury forecast.

The recently released IRD KiwiSaver Evaluation Report gives a comprehensive review of the scheme up to June 30.

One of the first observations is that 181,842 individuals aged 17 or under had joined the scheme by June 30. This represented 17 per cent of total KiwiSaver members.

The IRD notes that most of these seemed to have joined for the $1000 kick-start and only 11,048, or 6 per cent of this group, made a contribution through the IRD during the June 2009 year.

This understates the situation because contributions for children can be made directly to the provider and do not have to go through the IRD. Thus the $4.25 billion KiwiSaver figure understates the size of the scheme because some money that does not go through IRD is excluded from this official figure.

One of the more positive aspects of the scheme is that members didn't reduce their contribution rate when the new Government cut the employers' maximum rate from 4 per cent to 2 per cent in April. The contribution rates as at June 30 were as follows:

90 per cent of employers, but only 12 per cent of members, had a contribution rate of 2 per cent.

3 per cent of employers, but 83 per cent of members, had a contribution rate of 4 per cent.

Few original members have cut their contribution rate from 4 per cent to 2 per cent since the April changes but new members have adapted to the change. Approximately half the new members were contributing at 2 per cent and just less than half had chosen to contribute at the higher rates, either 4 per cent or 8 per cent.

Another noteworthy feature is that 56 per cent of KiwiSaver funds are invested in New Zealand assets and 44 per cent offshore.

This is a low domestic figure, particularly as 84 per cent of all Australian superannuation funds are invested in domestic assets and only 16 per cent offshore.

However, New Zealanders have always invested the majority of their superannuation funds offshore as only 42 per cent of traditional New Zealand superannuation funds, excluding KiwiSaver funds, are invested in New Zealand with 58 per cent invested offshore.

KiwiSaver has a higher percentage invested in New Zealand assets but this may not continue as the country doesn't have vibrant and large domestic capital markets. A higher percentage of KiwiSaver funds will be invested offshore unless we develop deeper capital markets. This would be a huge disappointment as far as the domestic economy is concerned.

The other important feature of KiwiSaver is the breakdown in the investment choice between conservative, moderate, balanced and growth funds.

The figures in the accompanying table are taken from the Morningstar KiwiSaver survey for the period ended September 30, which covers investment performances during the first two years of the scheme.

The first point to note is that only $940 million, or 23 per cent, is invested in growth assets. By contrast 52 per cent of Australian superannuation funds are invested in growth assets, based on the assumption that there is the same growth/non-growth asset mix offshore as there is in Australia.

The New Zealand scheme was deliberately structured to start on a conservative note because Finance Minister Michael Cullen didn't want individuals, particularly first-time financial market investors, to have an early negative experience. To achieve this goal Cullen appointed six default providers - AMP, ASB, AXA, ING, Mercer and Tower - and these default funds have $1.6 billion, or 40 per cent, of the KiwiSaver funds covered by the Morningstar survey.

These six default funds are conservative and low-risk. This is reflected in their performance for the two years ended September, where the weighted average return was 3.7 per cent a year with the best-performing fund producing 4.2 per cent a year and the worst 2.5 per cent. This is a solid start, particularly in light of sharemarket performances throughout most of this two-year period.

The conservative and cash funds included in the table include the default funds and all other similar type funds. The 23 funds in this asset class, which operated for the full two-year period, had an average weighted return of 3.7 per cent a year.

The other three asset classes performed as follows:

The 17 moderate and fixed-interest funds had an average return of 0.7 per cent a year.

The 21 balanced funds had a negative return of 1.9 per cent a year.

The 41 growth, equities and property funds had an average return of minus 4.8 per cent a year.

The weighted return of all 102 funds was a positive 0.5 per cent.

The Morningstar figures show the higher the risk the worse the return and the spread between the best and the worst-performing fund was much wider in growth funds than in conservative and cash funds.

The spread between the best and the worst in the conservative funds was only 5.9 percentage points, between 7.0 per cent and 1.1 per cent, whereas the spread over the growth funds was a huge 36.9 percentage points, between plus 12.9 per cent and minus 24.0 per cent.

The spread between the best and worst-performing growth funds will usually be much wider than with the conservative funds but growth assets should outperform conservative and cash funds over the longer term.

Cullen made an astute decision regarding the default funds and their relatively good performance has been a big contributor to the success of KiwiSaver. However, over time there is expected to be a steady movement from more conservative funds to growth funds as individual portfolios grow and members become more financially literate.

The IRD's report noted there were 17,975 transfers between schemes in the June 2008 year and 50,735 in the latest year.

It believes that members will actively monitor their accounts as balances increase and "the number of transfers will grow as providers compete for the business of existing rather than new members".

The KiwiSaver scheme, which has got off to a fantastic start, is a great initiative. It should help create a badly needed savings culture, encourage members to become more financially literate, provide funds for local companies to grow and give a badly needed boost to our underperforming capital markets.

Disclosure of interests: Brian Gaynor is an executive director of Milford Asset Management and manages a KiwiSaver fund. bgaynor@milfordasset.com