Market wobble exposes flaw in KiwiSaver

New Zealanders’ assessments of the country’s performance this year tend to range from the smug to the selfcongratulatory. We’ve shaken off the effects of lockdown well so far, and have largely avoided the waves of Covid still hitting the rest of the world.

But this year has, to my mind, highlighted a major flaw with an otherwise good scheme – and that’s KiwiSaver.

Some of us are ending the year materially worse off than we really should be. And it’s just because we didn’t have the information necessary to navigate the market downturn in March.

When Covid-19 started to take hold around the globe, sharemarkets fell sharply. For many people in KiwiSaver, it was the first time they had seen their balances fall so fast. KiwiSaver investment returns fell 122 per cent for the 12 months to the end of March, from $3.8 billion in the year to March 2019 to a combined loss of $820.9 million.

But in an ideal world, KiwiSaver members wouldn’t have been bothered by this.

They should have already been in the right sort of fund for their circumstances and should have been able to tell themselves it would behave as it should through the downturn.

Except, for lots of people, that wasn’t what happened.

It’s hard to pin down exactly how many people moved their KiwiSaver money to less risky funds in March. Morningstar estimated that $1.4b shifted into cash and conservative funds. There were 256,393 fund switches during the year, an increase of 54 per cent compared with the year before.

I saw people on Facebook advising others to shift as quickly as they could to avoid losses. One financial adviser who should have known better was warned for telling clients to move, en masse. My email inbox filled with messages from panicked people.

The problem was that many of those investors sold out of assets such as shares at the low point of the market. They then shifted into funds that largely invested in the likes of term deposits and cash – and weren’t in the market when it rebounded.

Some switched back but it was too late to save the lost money.

This has made a tangible difference to balances, and to retirement funds. One financial adviser estimated that the panic sellers missed out on a combined $3.5b in retirement savings.

It’s a predictable symptom of a scheme that puts everyone into managed funds without any requirement that they really understand what that means. For people who’ve only ever dealt with bank accounts up to that point, it’s an entirely new world.

The effect of good financial advice during

One financial adviser estimated that the panic sellers missed out on a combined $3.5b in retirement savings.

this period was obvious – advisers I spoke to told me their clients were unfazed by what was happening and happy that they might even be able to pick up some investment bargains.

It’s a feature of KiwiSaver that people can move between funds relatively easily, but in this case it’s been a major drawback.

Ideally, everyone joining the scheme would receive some personalised financial advice so they had a basic understanding of what they were in for – as well as regular check-ups.

Failing that, there need to be better measures to catch them at the point of switching to make sure that it is really in their best interests.

Some providers added pop-up messages to ask switchers if they were sure, but that probably wasn’t going to be enough to change anyone’s mind mid-panic. Phone calls would be better, though providers reported being overrun.

KiwiSaver providers are earning decent money – $538.9 million in the year to March, according to the most recent Financial Markets Authority report. Now’s the time to step up their advice and education efforts to make sure more losses aren’t locked in the next time the market wobbles.