Putting people who are automatically enrolled in KiwiSaver into a default fund may be cutting them short by hundreds of thousands of dollars in their retirement, an investment expert warns.

Troy Swan, chief executive of KiwiSaver provider Milford Asset Management, told a retirement savings conference, New Zealanders were not saving enough and the money they were saving was being invested poorly when it came to creating long-term wealth.

People who start a new job or switch jobs are automatically enrolled into one of nine KiwiSaver default schemes, which are invested conservatively.

They were designed as a temporary parking space for people to go while they decided which fund to invest in but as of March 31, 2017, 446,543 were in the funds and the number is continuing to grow.

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"When you go into default if you are not making a selection the Government in effect is giving you advice and that advice should be age-based investment allocation.

"If you are younger you are going into growth funds if you are older you can go into more conservative funds."

"The differences in these returns are worth hundreds of thousands of dollars in someone's retirement."

His view was backed up by KiwiSaver regulator the Financial Markets Authority.

Liam Mason, FMA director of regulation, said the default mechanism was a really good way to enrol people.

"But it is not a good way to build a savings habit - it just fails to do that."

Mason said that was backed up by the numbers of people who were not contributing at all and did not contribute enough to get the full member tax credit from the Government or enough to have a decent amount of retirement savings.

Last year 525,000 of the 2.7 million members contributed nothing to the scheme and a further 600,000 put in less than $1040 the amount needed to get the full $521 annual bonus from the government.

"We know when it comes to retirement savings one of the things we can control is how much we contribute - to the degree of what we can afford - and how long we contribute for - those are the choices that make the biggest difference for us. The default provision at the moment just doesn't encourage that."

Mason said it was "nuts" for people in their first job to be put in a conservatively invested fund.

The conservative setting was initially designed to be a parking space while people decided which fund to move to.

Liam Mason, director of regulation at the Financial Markets Authority, says KiwiSaver's default scheme set up needs to change. Photo/Supplied.
Liam Mason, director of regulation at the Financial Markets Authority, says KiwiSaver's default scheme set up needs to change. Photo/Supplied.

It was reviewed in 2013 with the National-led government deciding to stick with the same approach.

But Mason said instead of it being a temporary holding place it had become a permanent parking space for people.

"We know now for a lot of people those decisions are not going to be made. And their default parking space is their permanent parking space."

Mason said people needed to be put into age appropriate funds where younger people were put into growth funds and then moved into more conservative funds as they got older.

Sam Stubbs, chief executive of non-for-profit KiwiSaver provider Simplicity, went a step further and said KiwiSaver needed to be made compulsory.

"I think we have got to talk about the C-word - compulsion. It has just got to happen because for 10 years now we have been trialling - mucking around with a voluntary system and it is not working."

The extra funds could go a long way toward making your retirement more comfortable. Photo/123RF.
The extra funds could go a long way toward making your retirement more comfortable. Photo/123RF.

Stubbs said there were concerns that KiwiSaver would widen the gap between rich and poor and that was now proving to be the case.

"The tax credit is nothing more than a middle class give away."

Stubbs said if the government made KiwiSaver compulsory it could ditch the annual subsidy which costs around $700m.

"That $700m of tax credit - it is ridiculous - I think that money should be funding schools and hospitals."