The Government has made some big changes to the KiwiSaver default providers last week which has left a lot of us wondering what these changes mean and whether there is a cause for concern.
In short; this really depends on your current KiwiSaver provider, whether you made an active choice of provider and individual circumstances, such as your financial and investment goals.
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Before we look at the changes, let’s quickly dive into default funds and providers.
If you have a KiwiSaver and haven’t made an active choice as to which fund you are a part of- you will have been placed in a default fund. The providers of these funds are Government selected, and you will have been allocated to one of these. Previously, there were nine default providers, and with the changes, come December 1st there will only be five.
Bottom line: if you don’t recall choosing your KiwiSaver fund- you will most likely be with a default provider and considered a “default member”. And you’re not alone in that, in fact there are currently over 381,000 KiwiSaver members who haven’t made an active choice and have been randomly allocated to one of the Government’s selected providers.
Rather than going through the names and back-story of the providers who were axed, added and reappointed (if you are interested, there’s a comprehensive list here) let’s look at the reasoning behind the Government changes and the potential impact of these on your KiwiSaver investment.
If you are a default member, come December 1st, you’ll fit into one of the following scenarios–unless you make an active change prior to this.
Expect to receive more correspondence about this in the coming months from your bank and/or current provider, however the big change that will affect both scenarios (all default members) is that your KiwiSaver fund will be automatically moved from a “conservative fund” to a “balanced” fund.
Historically, all default providers have been conservative; essentially lower risk, and slower growth. These funds have minimal fluctuation either way even when the market is volatile. As of December 1st all default providers will become balanced funds.
Why has the Government done this? There’s two reasons that we can clearly see from the announcement. One is lower fees from the default providers- which is hugely positive. This will most likely have a flow on effect as many of the existing providers will be trying to hold on to their existing members, and may lower their fees competitively as a result.
The other reason is even though balanced funds are subject to more fluctuation, they tend to balance out over time and result in more growth. The Treasury/MBIE review looking at KiwiSaver providers found default members were collectively losing millions of dollars over the long term having their money invested in low-risk, low return assets. The move will leave the majority of default members in a better financial position in the long run, especially when it comes to retirement.
For those who have already made an active choice in their KiwiSaver provider–we aren’t ignoring you, but these changes will largely not affect you. Remember, if you are currently a default member, you can opt to make a change of fund type and provider at any time. And this is not just limited to the newly selected Government providers. However, these changes do offer an opportunity for all of us to re-evaluate our financial goals in the short term and long term.
Why is it a good time to re-evaluate? A lot of our own client base have ambitions to climb on the property ladder in the next 3-5 years and purchase their first home, which KiwiSaver often plays a crucial role in securing. If you are withdrawing your KiwiSaver in the short term and have been sitting comfortably in a conservative fund, the move to a balanced fund may be too risky–a share market crash could leave you out of pocket by thousands, without the chance to wait for the market to stabilise again. This is just one potential scenario, but shows how our KiwiSaver investments are closely tied to our financial goals and future.
If these KiwiSaver changes have left you with any questions about how you can go about maximising growth, or protecting your investment, we are offering personalised advice completely free of charge. Give any of our team a call or come and see us. KiwiSaver for many of us is quite often the first and most important investment– you deserve to reap the benefits.
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