KiwiSaver: Young Kiwis in the wrong fund
The FMA are calling on young Kiwis to check they are in the right KiwiSaver fund following the large-scale switching during Covid-19 market fluctuations.
Tuesday, May 25th 2021, 4:47PM 
4 Comments
by Daniel Smith
The regulator has shared data indicating over 12,000 KiwiSaver members aged 26-35 years old are sitting in lower risk or conservative funds after switching from higher-risk growth funds during Covid-19 market volatility.
Data supplied to the FMA by 11 KiwiSaver providers shows around 12,700 younger KiwiSaver members switched from growth to conservative funds between February and April last year.
Most of them are still sitting in conservative funds, which may not be aligned with their long-term savings goals.
FMA manager of investor capability Gillian Boyes says, is calling for young New Zealanders to check if they’re in the fund that suits their needs.
“Generally speaking, you should be in a high growth fund the younger you are and the further you are from retirement.
“Growth funds provide the greatest opportunity to maximise returns and although the balance might jump around, young people have plenty of time until retirement age to recover any losses.
“The exception is if you are planning to make a first-home withdrawal within the next one to three years and may want to choose a conservative fund so you have more certainty around your balance.”
Boyes said the number of young people who are in a fund that does not match their needs is likely larger than the data suggests, as FMA data represents around three-quarters of the KiwiSaver market.
The FMA will soon release the full dataset in a report focused on KiwiSaver fund switching during the pandemic.
Head of sales and marketing at Mint Asset Management, David Boyle says that the data does not surprise him, but the demographic age range does raise an eyebrow or two.
“In that period last year when Covid hit we saw a number of New Zealanders make this change. I think it was around $450 million dollars that moved from growth to conservative.
“I am a bit surprised by the numbers of younger people being involved.”
According to Boyle this is an issue that can only be solved by all KiwiSaver providers working together.
“Every KiwiSaver provider should be looking at how they communicate with their members.
“This data … shows there is actually quite a large number of young people in conservative funds where they [may think they] don’t need to be worrying about [fund choice] too much because retirement is a long way away.”
Boyle says that in talking to these members it is crucial that all providers are singing from the same songsheet in getting the youth engaged in their KiwiSavers.
“This whole thing highlights that this conversation and the messaging around it needs to be similar across all providers.
“The power of all providers saying the same thing on this is crucial if this message is going to get out to the masses.”
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Comments from our readers
These are millennials, who have not taken advice (or proper advice). Most making a switch in March were bank customers, who could see their balances on their phone.
1 - they don't know their tolerance. They don't know how to suffer consequences or appreciate hardship (losses) because they have been so overly protected. From sports to school this lot was raised on everyone winning, all the time. This raised a generation prone to over-estimating their ability to understand and accept downward market movements. For many, this is their first major downturn. KS was in its infancy during GFC, so small balances and low participation. This time, big movements on bigger balances...
2 - as a generation that switches brands and jobs as often as they get another tattoo or trim their beards, they don't think and plan long term. They don't understand what their goals are, and therefore have no appreciation of their required rate of return. They went for the one that paid the most, or were placed there by over-simplified profiling questions which were heavily weighted by their age.
3 they have limitless upside risk-absorbing capacity. Only limited or motivated when the downside risks play out. So risk capacity is not a valid measurement. This is borne out by them wilfully ignoring downside risk when the market is rising, and willingly accepting the underachievement risk from switching post-collapse, and then missing the recovery.
The curious thing here is the language. While the industry now says these folk are "in the wrong fund" the punters probably thought they were in the wrong fund prior to their recent switch.
Those who used an adviser were half as likely to switch (notwithstanding one particular adviser...). This is the real story here. What we do, those conversations and newsletter and phone calls we made during that time - they matter.
The Boomers felt it
The X & Y saw it and felt it some
The Millenials haven't seen or heard any of it.
The Boomers are overconfident but have gone well, the X & Y's are somewhat the opposite (they coined emo) and the millennials seem to have a shiny happy day view of everything.
Don't get me wrong, a positive outlook is great, but the lack of downside risk understanding is scary and is likely to have serious consequences.
What we do is very important, at the same time, the new rules almost ensure that this sector of society isn't going to get it. Fee for service on KS advice with full advice requirements on fund switch within the same provider meaning they won't want to pay for it.
Congrats on mentioning the 3 legs of risk. I've been trying to convince advisers I talk to and my adviser clients that a questionaire is not good enough on it's own. Thanks for putting it out there and I hope the industry takes note.
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Risk assessment has always been a 3 legged stool
1. personal risk tolerance
2. required rate of return to meet goals
3. capacity to absorb risk.
My reading of past FMA pronouncements and guidance to advisers was always that they considered No 1 - personal risk tolerance - was paramount. It ranked 1st 2nd and 3rd.....
Has something changed and I missed the signal?