KiwiSaver: why it’s so popular

Published in Stuff BusinessDay, November 4, 2014

In seven short years over 2.3 million New Zealanders have signed up and collectively saved around $20 billion. Love it or hate it, and most of us love it, you can’t deny that KiwiSaver has been a huge success in both getting savers on board and beginning to accumulate an impressive national nest egg. What has driven KiwiSaver’s tremendous popularity?

You just need to look at KiwiSaver’s benefits to see its pulling power. Your employer contributes at least three per cent of your gross pay on top of your own contributions, which may be set at three, four or eight per cent. When you join KiwiSaver the government provides a $1000 kickstart payment, and then continues to make an annual contribution of up to $521 for members aged 18 or over who are paying into their fund. It’s also portable, moving with you as you change jobs or leave the workforce. It also has the benefit of having your contributions deducted from your pay before you see it, which for most of us makes saving easier.

Another big draw card is that you can use some of your KiwiSaver savings to help buy your first home. That’s particularly useful for first-home buyers who may struggle to get a deposit together, especially in regions where housing demand is currently outstripping supply.

Automatic enrolment in the scheme may also account for the significant numbers of KiwiSavers today. When you start a new job, you’ll be automatically enrolled if you’re not already a member.

There remains flexibility for those who prefer to opt out. While KiwiSaver appeals to many of us for its obvious benefits, the scheme recognises it may not be right for everyone. Some would prefer to manage their own investment strategy, while others would prefer to spend their income on more immediate priorities.

The architects of KiwiSaver clearly intended it to have mass appeal. It was meant to provide an opportunity for as many people as possible to save for a more secure future. Several of our banks offer KiwiSaver funds and that helps enormously with take-up because most of us have a banking relationship.

The accessibility of our banks isn’t the only thing in their favour as KiwiSaver providers. While frontline bank staff can provide you with information about their KiwiSaver products, banks also offer tailored financial advice to help inform your decisions.

The suitability of banks as fund providers is also reflected in the government’s choice of default providers for KiwiSavers who haven’t chosen their own scheme. The first six default providers selected in 2007 included one bank. When the default providers were reviewed earlier this year, five of the nine default providers were banks. They were chosen on the basis of strict criteria including their organisational credibility, range of investment options, competitive fees, and investment capability.

The convenience that comes with bank providers is also a factor that can’t be ignored. Many of us do enjoy being able to see all our accounts online at a glance, including our growing KiwiSaver balance. The performance of the banks’ funds is also a factor worth taking into account.

The number of savers switching among KiwiSaver providers has attracted some interest recently. The number of scheme transfers was relatively high early on when the number rose from around 20,000 in 2008 to around 120,000 in 2010. Then it plateaued to about 100,000 in 2012, and rose again to around 150,000 switches this year.

While it’s not clear what’s driving this, the level of competition in the sector may be an important factor. It’s also relatively easy to switch providers, often at no cost. So KiwiSaver may be less “sticky” than other financial products.

Switching in itself is not a bad thing. Easy switching was an important consideration in KiwiSaver’s design. The default funds all have a conservative investment approach and are meant to be temporary holding funds as KiwiSavers consider the best fund for them.

In an ideal world people should be getting financial advice on KiwiSaver options that best suit their circumstances. The reality is that people may not be inclined to pay for financial advice, or have the time to talk to a bank adviser. This is especially the case where their KiwiSaver balance may still be relatively low. As the scheme matures and savers’ balances grow, there may be a greater appetite to seek professional advice. In the meantime free advice, and online tools such as Sorted’s Fund Finder, may meet their needs.

KiwiSaver has a lot going for it, and it’s no surprise that we’ve jumped into the scheme in such numbers. As the scheme evolves banks will continue to play their part in KiwiSaver to help New Zealanders save for a better future.