Kiwis still lack knowledge of their second-biggest financial asset, KiwiSaver

Thursday, 4 October 2018

There are still lots of gaps in our understanding of KiwiSaver. First published in 2018.

KiwiSaver will be many New Zealanders' second-biggest financial asset over their lifetimes.

But even 10 years on, many of us still don't have much idea about KiwiSaver, or how it works.

New research from Canstar has found that more than a quarter of women don't understand what they're reading when they get written communication from their KiwiSaver providers. Twenty-one per cent of men said KiwiSaver needed a 'jargon buster'.

Of the 11 per cent who did not bother to read the information their KiwiSaver providers sent them, 35 per cent said that was because they did not think they would understand it.

* Future murky for KiwiSaver predictions

Put in at least $1042 a year to get the full government contribution.

* Here's why you should ignore this KiwiSaver report**

'Unlike say, a mortgage or a term deposit, KiwiSaver is not a straightforward financial product,' said Canstar general manager Jose George.

'Often consumer literature is peppered with 'financial speak' which can be off-putting and even intimidating so people may find it easier not to engage.'

It comes after data from the Commission for Financial Capability found about 800,000 KiwiSaver members did not know which fund they were in and half that number did not know what the were contributing, or their total balance.

Here are the top things causing confusion.

FEES

Members are now shown in dollar terms what they are paying each year to their KiwiSaver providers.

Adviser Camilla Gribble says people don't realise how many KiwiSaver providers there are.

But AUT associate professor Aaron Gilbert said many people did not understand how fees worked and the long-term implications of them.

'Higher fees reduce investment returns over the long run, sort of reverse compounding where the extra monthly fees mean you lose investment returns.'

Canstar research showed, for someone with a balance of $11,500, the average conservative fund fee was $120.27 a year. For balanced funds it was $152.99 and for aggressive funds, $191.56. In some cases, the highest fees charged were more than three times the cheapest option available.

If you are questioning your fees, ask the provider what you're getting for your money.

RETURNS

KiwiSaver providers all report the performance of their funds each month, quarter and year. But Gilbert said people put too much emphasis on that.

'The providers themselves state past returns are no indicator of the future.'

Just because a provider had a good month, or even a good year or two, it does not mean that the performance will be sustained in future.

To better compare returns, consider how your fund performed compared to others that are similar - by comparing growth funds with other growth funds over a number of years, you'll get a better idea of who stands out than you would by simply looking at at the percentage return in isolation.

Aaron Gilbert: People still don't understand the impact fees can have.

Research house Morningstar offers a long-run analysis of KiwiSaver performance.

MEMBER TAX CREDITS

When asked if they received the annual government contribution of $521, called the Member Tax Credit, in the past year, the commission found 28 per cent of KiwiSaver members did not know.

Ten per cent were not aware the government contribution even existed.

If you contribute $1042 to your KiwiSaver account in a year, the Government will chip in 50c for every dollar up to that amount - or a maximum of $521.

Gilbert said this was a source of confusion for many people, not knowing what they were eligible for or if they were on track to get it.

The Government isn't able to tap into your KiwiSaver account.

Most providers have started to get in touch with members each year to tell them to top up before June 30 if they risk not getting the full government contribution.

WHOSE MONEY IS IT?

It's still common to hear people talk about not wanting to 'trust the Government with their money' by putting it in KiwiSaver. You're not. Money invested in KiwiSaver is handled the same way as if you invested in your own independent managed fund. The Government cannot dip into it if it gets a bit short of cash.

NO GUARANTEES

The downside of this independence is that is that there is no government guarantee on your KiwiSaver money If your fund manager fails spectacularly and your investment vanishes, the government will not come in and save you.

'That seems to be a perennial misunderstanding,' Gilbert said.

WHAT FUND? WHICH PROVIDER?

It seems like the most basic aspect, but a lot of people still don't know exactly where their money is or how to check in on it.

Camilla Gribble, a KiwiSaver adviser at IKONIK, said many people were automatically enrolled by their employer or bank and did not engage with the process.

'They don't realise that there are so many different providers, how important it is to select the right fund and what difference making good decisions could make to their KiwiSaver balance over the long-term.'

'It seems too many of us are passive participants in our preparation for retirement,' said Commission for Financial Capability group manager community and education Peter Cordtz.

'Life isn't Lotto – you can't just leave everything to chance and hope for the best. KiwiSaver is something you can control through choosing the right fund type for you, choosing the highest contribution rate you can afford, and making sure you qualify for the Member Tax Credit each year.'