Young KiwiSavers face a risky option

Younger KiwiSaver contributors could see their savings put into risky investments. Photo / The Aucklander

Young people who join the KiwiSaver scheme could have their contributions put into more risky investments to help put money into New Zealand companies.

The Ministry of Economic Development is investigating the possibility for younger savers who have not chosen a fund.

When KiwiSaver was started in July 2007 to boost New Zealander's retirement savings, it was hoped the influx of money would also give a boost to companies listed on the New Zealand stock exchange.

But there has been little evidence of that happening.

In its first annual report on KiwiSaver, which covers the year up to the end of June 2008, the Inland Revenue Department says 38 per cent of the 716,637 members were in "default schemes" - where members are allocated if they do not make a choice.

Default schemes are conservatively invested and must by law have less than 25 per cent of their money in shares or property.

There is no requirement for the money to be invested in shares in New Zealand companies, and last year only 6 per cent of the money in the default funds was invested in the local market.

The figures also show young people are most likely to be automatically enrolled in KiwiSaver and stay in a default scheme.

Of those who were auto-enrolled 58 per cent were under 35 and more than 70 per cent of these had not chosen a scheme.

That has raised concerns that many investors may not be in the right fund for their risk profile.

Younger investors are usually advised to put more of their money into shares and property because they have been shown to increase in value the most over a long time.

But they also have high levels of volatility.

People close to retirement are advised to be more conservative as they prepare to tap into their investment to supplement their income.

The Ministry of Economic Development is to investigate linking age to risk.

The ministry's financial sector team manager, David King, said the investigation had been prompted by concerns raised at the Prime Minister's job summit.

The ministry was looking into whether the default should be an automatic "lifecycle" choice, rather than a conservative choice.

NZX head of market products Geoff Brown said he was not aware of the idea, but broadly supported changing the default.

Mr Brown said it was hard to judge exactly how much benefit the New Zealand market had seen from KiwiSaver.

But the number of people who had joined KiwiSaver had far exceeded expectations and at least some of that money would have come through to the markets.

Retirement policy and research centre co-director Michael Littlewood said changing the default option to be age-related could be difficult as not all investors had the same goal.

If the default conservative option was not right for a younger saver, it should be up to the provider to explain why and convince them to change schemes.

He did not believe the option should be changed to encourage more money to be invested in the New Zealand sharemarket.

"It should be focused on what is right for members and supporting the local sharemarket may not be right for members."

Investment Savings and Insurance Association chief executive Vance Arkinstall said people had benefited from being in conservative funds in the current economic climate because sharemarkets around the world had fallen significantly.

But there were signs the market was picking up, and investors needed to think about whether the default funds were appropriate.

"People need to think about whether to change to a growth investment fund to make the most of returns. They really need to make sure they are in the right place."

* Kiwisaver

More than a million savers - as of last week.

More than $2 billion invested.

38 per cent in six default schemes.