KiwiSaver: Next crunch could be tougher

KiwiSaver members shrugged off the only real downturn they have experienced because government incentives covered up its impact – but next time will not be so easy, new analysis suggests.

The superannuation savings scheme has attracted many more members than was anticipated when it launched – it now has more than 2.7 million members and $40 billion under management.

But Ben Trollip, an actuary at MJW, said the government had been lucky with its timing. The markets had been on KiwiSaver’s side through almost all of its existence.

The scheme was launched ten years ago, just before the global financial crisis hit.

But once markets recovered, they entered a bull run that has lasted ever since.

Trollip said the impact of the GFC on KiwiSaver members had been limited because it happened at a time when balances were low, and returns were being boosted by government incentives such as tax credits and the $1000 kickstart.

“You wouldn’t want a bad period of returns at any time. But if you have to have one GFC and then a fantastic bull market, in a situation where your balance is increasing over time you’d prefer the order is bust then boom as opposed to the opposite.”

MJW’s research showed that at the lowest point, New Zealand and global shares lost about 50% of their value.

But members were largely unaffected because balances were so low.

The next crisis, even if it is not quite as big as the GFC, could have a larger impact in dollar terms because they now have more funds at risk.

Trollip said he was worried that members might not know what to do. The government incentives are no longer such as significant part of members’ balances, so the impact will be more noticeable.

“Certainly at some point there will be another crisis. When that occurs, people need to take the emotion out of the decision. It’s easy to make the decisions that feel good. Often the best long-term decision is to do something that feels the exact opposite.”

Trollip said there was a risk that people had been taking more risk than they should because markets had been so strong. “At the moment the markets have been going so well and everyone is so happy to take plenty of risk and they feel they’ve been very smart to do so. But there’s good reason not to over-extend. Don’t be tempted to increase risk to take high returns because of recent results.”

He said MJW’s latest update showed a wider range of returns from managers in NZ shares than would normally be the case. Trollip said that was due to the big rise in value of A2 milk. Those that had been underweight to the stock looked to have performed more poorly.