KEY POINTS:
As KiwiSaver sign-up numbers soar beyond most expectations, a potentially worrying trend is developing, with large numbers of new savers making no decision about where their money goes - leaving it to sit in conservative "default" funds.
While low-risk, conservative funds are viewed as a good idea only for those savers needing their money soon, they are widely viewed a bad idea for those not needing it for decades, because it means missing out on much higher returns.
As many as half the 317,000 people who have signed up for KiwiSaver have shown no preference when it comes to the financial institution that will manage their money, says ASB Group Investments, one of the country's six default providers.
Anyone who joins KiwiSaver and makes no preference will automatically be put into one of these accounts, with investments specifications laid down by the Government.
"It suggests that while there is a great deal of enthusiasm for KiwiSaver, there is also a great deal of uncertainty among the public and employers," says Peter Hall, head of group investments for ASB. Rather than making any decision on where to put their money, they are instead "simply letting IRD do the selecting".
Hall says this trend may change when the first wave of those signing up is processed, and as people become more familiar with KiwiSaver.
ASB Group Investments thinks it has a market share of about 20 per cent of KiwiSaver members.
"I don't think it has to be concerning - if it continued into the longer term, then it could be concerning, but that would be a longer-term issue," says Hall.
"I think it's fair to say this whole investments arena is fairly new to an awful lot of New Zealanders and is something that is relatively complex - and being something different, people are very cautious about it."
A conservative fund is a sensible option for those nearing retirement, or for KiwiSaver members hoping to buy a house soon, taking advantage of the mortgage diversion option.
Steven Giannoulis, general manager of marketing at ING New Zealand, which is also one of the Government approved default providers, says the numbers of default KiwiSavers going through ING is not as high as those seen at ASB - about 35 per cent to 40 per cent. He says the ING scheme is sold through financial advisers, whereas ASB's one is sold more through its banking network - a possible reason for the higher level of "active choice".
ING's default scheme is "relatively simple" with less features and options.
Someone with money in an ING default fund gets balance and transaction information, but maybe not as often. A magazine about options and schemes is offered to investors in other schemes, but not in the default.
Fees are lower in the default scheme, but it is not expected to perform as well as the other schemes run by ING - where a more active approach is taken to investing.
ING, says Giannoulis, has never run a scheme like its new KiwiSaver default one.
"We can show we can add value, but we've never done one quite like this. It may outperform in short periods but is unlikely to do so over the long term."
KiwiSaver funds across the board are "low-margin, low-fee business" whether you're active or default, "it's just the default is even lower".
People with a long time to retirement should be in a higher risk and return product, says Giannoulis.
A move away from these conservative default funds may gather steam in the longer term, when fund managers such as ING can show results demonstrating they are adding value.
"If we can show we're outperforming default funds and can deliver value, then people will migrate," says Giannoulis. "They will make choices, they will be more comfortable about what KiwiSaver is. They will be more comfortable about how it works."
Giannoulis, looking across the Tasman to Australia, says the the financial planning community got a boost when superannuation account balances started mounting up.
"With only a few hundred dollars, there was little interest in different products offered, but once this became thousands, people started looking for advice and investigating products. Effectively, the Government is worried about someone saying 'I got put into a scheme you gave me and it wasn't very good'."
What's the difference?
* Investors in moderate investment funds usually have a medium to long-term investment time frame, and while they would like to see their investment keep ahead of inflation, they do not want to see their investment value fluctuate too much. This means their investment has a higher proportion of more conservative investment assets - such as cash and fixed interest - and a lower proportion of more aggressive investment assets, such as property and shares.
* Investors in growth investment funds will usually have a longer term time frame and sometimes want to maximise returns over decades rather than a few years. In a fund such as this, the value will fluctuate significantly from year to year and includes more risk of losses. There will be a lower proportion of conservative assets, such as cash and fixed interest, with much more - up to 80 per cent in some cases - of riskier assets like shares and property.
* Peter Hall, of ASB, describes how a growth fund might work: "I'd say that over time you'd expect a far higher return, but you'd expect greater fluctuations. One year you might get 20 per cent, the next 2 per cent, so your average over the two years will be 11 per cent. Compare that to a bank deposit, where you might get 8 [per cent]."
