KiwiSaver’s simplicity wins the day

KiwiSaver’s simplicity wins the day

KiwiSaver has been in operation for five years with overall membership approaching two million. It still has its detractors who find fault with design and implementation but the occasional glitch should not detract from the overall success, to date, of KiwiSaver. The generous incentives in place at inception – that surely enticed many people to join – have slowly been withdrawn at the expense of a newly acquired savings habit.

KiwiSaver has a number of inbuilt features and advantages that are seldom mentioned, which place KiwiSaver in a good position relative to retirement savings programs in other countries.

1. Portability

Each KiwiSaver member has one savings account that is used throughout the entire membership tenure (irrespective of how many times the member may change employment). Should a member decide to switch schemes, the full account balance must be transferred. While this may seem pretty basic, lack of portability is a major problem in many countries. It prevents the issue of multiple superannuation accounts – which create problems for members who can lose track of their savings position and can compromise the consistency of their investment strategy. KiwiSaver members do not face such difficulties.

2. Minimal leakage

Money leaving the retirement savings pool is a significant problem for the retirement savings industry globally and a major reason why most people are retiring in a weak financial position. In many instances, it is just too easy to get your hands on these funds. This is a major problem in countries such as South Africa and pension reform is looking to address this issue via enforced preservation.

While KiwiSaver members can access their funds under certain conditions, it is by no means easy or guaranteed. KiwiSaver has been designed to limit leakage. Members facing legitimate financial hardship or ill-health concerns have the ability to tap their KiwiSaver savings but the system does not appear prone to abuse. The contribution holiday facility is a form of leakage and this is possibly one area where the rules can be tightened. A large percentage of these contribution holidays are the result of children having been registered for KiwiSaver in order to receive the initial $1000 Government contribution. Those parents or the children themselves should now consider making contributions to those KiwiSaver accounts to take advantage of the power of compounding interest.

3. Basic Investment Options

Many retirement savers in the United States are overwhelmed by investment options. Too much choice can lead to suboptimal investment decision-making. According to consulting firm Aon Hewitt, the median number of investment options that US companies offer their employees in 401(k) arrangements is 18, up from 10 in 2001. The median number of investment options across public KiwiSaver schemes is just 5.

4. Five-year performance update

The ability to conduct meaningful KiwiSaver investment performance analysis is improving as fund track records extend. By the end of September 2012, many funds will have a five-year performance track record. Many of the articles in the press are short-term oriented and seldom present the perspective of a long-term investor. In a number of cases, the performance of KiwiSaver funds is better than similar asset class funds due to their low fee structure. When the tax credits and employer contribution are added to the equation, then the total return is well into positive territory even if the actual fund performance was negative.

The field of investment performance analysis is highly complex and predisposed to all sorts of misinterpretation. The standardisation of KiwiSaver fund return information published by providers is a critical first step towards demystifying investment performance.

KiwiSaver continues to be an excellent investment vehicle and is certainly starting to attract the attention of those countries around the world looking to develop low cost, simple, yet effective solutions for their populations to accumulate retirement savings. Once again, New Zealand seems to be leading the world.

Source: Adapted from NZ Trends Newsletter, July 2012.

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