KiwiSaver: Consider taking a lower risk level

I have been in KiwiSaver for over five years. I always thought that there was some kind of government guarantee, so that in a worst case scenario the Government would bail us out. However, I have been told that this is not true. KiwiSaver is a government scheme, so why don't they provide some kind of guarantee?

No, KiwiSaver does not come with a government guarantee.

If investment markets go down and your savings lose value, there is no government safety net to magically restore those losses.

Is this a problem for you? If you do not have confidence in the ability of your KiwiSaver fund manager to invest your money prudently, then you should consider a lower risk option such as fixed interest (although this can still fluctuate in value) or cash (the lowest risk option).

Choosing a low risk option may help risk-averse investors sleep better at night but it will also reduce the return they receive over the longer term.

That is the trade-off between risk and return - if you want a higher return you need to take more risk.

Every KiwiSaver investor should work out their own risk profile, and then choose a fund to suit them. How do you go about doing that?

Try using the Sorted FundFinder website - answer their simple risk profile questionnaire and then compare funds in the different risk categories.

You can also click through to the fund managers' websites and read up on their investment strategies, and how they invest KiwiSaver dollars.

A government guarantee sounds great in theory, but it can be tricky in practice. Firstly, some fund managers might be tempted to take undue risks, knowing that the government has provided a safety net.

Secondly, it creates an un-level playing field for investors. We saw this in 2008 when the Government introduced the Retail Deposit Scheme to protect investors in certain banks and finance companies.

Investors poured their savings into these 'no risk' investments, some offering up to 8 per cent per annum - well above the return offered by government stock (the traditional benchmark for a low risk investment).

The huge inflow of funds initially provided welcome cash flow for some struggling finance companies, but ultimately just delayed their eventual collapse.

The biggest failure was South Canterbury Finance which collapsed in August 2010.

The government forked out 1.6 billion of taxpayer dollars to 35,000 investors, a very costly bailout. But $1.6 billion is small bikkies compared to the funds now in KiwiSaver - currently heading towards the $40 billion mark.

It would be foolhardy for any government to underwrite such a large sum.

KiwiSaver schemes are regulated by the KiwiSaver Act 2006 and monitored by the Financial Markets Authority.

The manager of each scheme has to make prudent decisions about investing the money received.

They are supervised by an independent trustee and audited.

They are required to send every member an annual statement.

The Government has a vested interest in KiwiSaver as it contributes to member balances by way of the annual tax credit (for those over 18 and under 65 who are paying into their accounts themselves).

KiwiSaver is an investment, not a bank balance. It is time for more of us to get familiar with our investment.

How many members read the information they are sent by their provider? All KiwiSaver investors need to be comfortable with the level of risk that they are taking.

They can only do that by finding out as much as possible about their KiwiSaver fund and where their money is invested.

- Shelley Hanna is an authorised financial adviser FSP12241. Her free disclosure statement is available on request by calling 06 870 3838 or go to www.peak.net.nz. The information in this article is general and is not personalised. Send your KiwiSaver questions to shelley.hanna@peak.net.nz.