Capital guarantee no silver bullet

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A plan to use capital guarantees to help entice KiwiSavers into growth funds is unlikely to be a game-changer for the scheme, a KiwiSaver manager says.

Monday, March 10th 2014, 6:00AM 1 Comment

by Niko Kloeten

The Financial Services Council will reveal its plan for capital guarantees in a few weeks, along with new polling of KiwiSaver members commissioned by the industry group.

FSC chief executive Peter Neilson touched on the topic in his speech at the Morningstar Fund Manager of the Year awards recently.

“We have polling that we will release in the coming months that shows that most KiwiSavers do not know the risk type of their KiwiSaver fund and that with appropriately priced capital guarantees most people in conservative funds would be prepared to move to balanced or growth funds that earn higher returns,” he said.

“Most New Zealanders understand that paying less than 0.5% per year for guarantees to earn 2% or more per year on average is a very good deal.”

Neilson said he couldn’t give much detail about the proposal until the official announcement, but he hinted it would be aimed at members of default schemes.

“KiwiSaver providers could do it as part of their regime but what we’re looking at is where do default members end up?”

Norman Stacey, a financial adviser and manager of the Law Retirement KiwiSaver scheme, said capital guarantees could be useful for some KiwiSaver investors, provided they made the choice themselves.

“I would still like to see investor choice rather than compulsion.  I can understand why people approaching retirement might want a capital guarantee,” he said. “But younger investors in KiwiSaver are looking for growth and if you have a capital guarantee it detracts from the growth returns.  There’s no free lunch.”

The appeal of capital guarantees depended on the attitudes of individual investors, he said.

“The more sophisticated recognise they are paying for it one way or the other.  It tends to be novices or people outside the industry that are initially attracted.”

Stacey predicted the issue of members being in the wrong type of fund would start to correct itself over the next few years as balances grew and more people started to seek financial advice.

However, he said the default funds are already capital guaranteed as they are heavily weighted to cash and bank deposits.

“These funds did what they were supposed to during the financial crisis but over the past five years their returns are lagging.”

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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