Conservative fund vs balanced fund: what the changes to the default KiwiSaver setting mean for new members and first home buyers

Sometimes the devil is in the detail. Behind the government’s recent announcement that from next year it’s excluding investments in fossil fuel production from default KiwiSaver funds, was a less newsworthy change to the KiwiSaver scheme: that, from June 2021, new default KiwiSaver accounts will be place into balanced, rather than conservative, funds.

What does this mean for new KiwiSaver members?

To understand the implications of this change, you need to understand the difference between the two types of funds:

Conservative funds hold fewer risky assets, such as stocks and shares, and more cash and fixed-interest bonds, typically around 65% to 90%. They seek to make average long-term returns, and are aimed primarily at people who expect to access their KiwiSaver money in the next two to six years and don’t want to risk their nest-egg being depleted by sudden shocks to the stock market – think coronavirus!

Balanced funds take a slightly more aggressive approach to investment. They hold more stocks and shares, up to around 60%, and seek mid-range, long-term returns. They are for people who don’t foresee accessing their funds for over a decade and are happy with slight wobbles in the value of their account on its rise upwards.

Although KiwiSaver providers encourage their members to make active decisions about their funds, a great number of members don’t bother. Out of KiwiSaver’s 2,934,268 members, according to the government: “690,000 have stayed in default KiwiSaver funds, which they were automatically enrolled in when they started a new job. Approximately 400,000 of those have not made an active choice to stay there.”

That’s 14% of members whose money could be working harder for them, if they took the time and effort to research which KiwiSaver fund is right for them.

Balanced vs. conservative funds – what are the returns?

If you jump onto Canstar’s free KiwiSaver comparison tool (hit the button below) – and look at the different returns offered by the two different types of fund, it’s clear to see why the government is making the changes. They want people to earn a greater return on their investments.

Compare KiwiSaver funds

Here is a list of some current default conservative and balanced KiwiSaver schemes (as of March 2, 2020), and their returns on a balance of $25,000 over the past five years:

Fund Provider Conservative 5-year return Balanced 5-year return
AMP 4.86% 6.84%
Booster 5.33% 7.51%
Kiwi Wealth 5.2% 6.37%
ANZ 5.12% 7.2%
Westpac 5.16% 7.91%

 

As you can see, there’s a marked difference in returns. Over the entire life of the KiwiSaver account, it can add up to hundreds of thousands of dollars:

Using Westpac’s different return rates as an example:

$25,000 over 30 years at 5.16%, compounded interest: $113,099

$25,000 over 30 years at 7.91%, compounded interest: $245,353

(NB: The above figures are for illustration only and use a fixed sum ($25,000) with no added contributions over the 30-year term. They are used as an example of how extra returns of just a few percentage points can make a big difference when compounded over a long period of time, such as the life of a KiwiSaver fund. They are not adjusted to take inflation into consideration, and don’t reflect that returns on investments can go down as well as up.)

Balanced vs. conservative funds – what are the risks for first home buyers?

While it’s clear that the government has good intentions, the move from conservative to balanced funds comes with added risk, particularly for those using KiwiSaver to fund the purchase of a first home.

Last year 39,617 members withdrew $953 million to purchase a first home, that’s up 32% on the previous year. According to the latest KiwiSaver report: “KiwiSaver is playing an increasingly important role in helping New Zealanders buy their first home.”

So how does it help putting the funds from members looking to save for a first home in the short-term into a medium-risk fund that’s best left untouched for over a decade (according to the Commission for Financial Capability’s own Sorted website)?

That’s the dilemma those using KiwiSaver as a means to purchase a first home must consider. Are the increased returns worth the added risk of finding your savings depleted at the very time you want to withdraw them, should the market fall?

Again, it’s worth looking at the numbers, over the past five years, the balanced funds listed above have, on average, delivered an extra 2%:

Using Westpac’s different return rates as an example:

$25,000 over 5 years at 5.16% compound interest: $32,151

$25,000 over 5 years at 7.91% compound interest: $36,580

(NB: The above figures are for illustration only and use a fixed sum ($25,000) with no added contributions over the 30-year term. They are used as an example of how extra returns of just a few percentage points can make a big difference when compounded over a long period of time, such as the life of a KiwiSaver fund. They are not adjusted to take inflation into consideration, and don’t reflect that returns on investments can go down as well as up.)

Regardless of whether your choose balanced or conservative, or even growth or aggressive, the key point to take away from the upcoming changes is the importance of exploring your many options. It’s your money, and regardless of which way the government wants to steer you, the final decision about your KiwiSaver fund is yours.

So get clicking on Canstar’s free KiwiSaver comparison tools, make an active decision, and take control of your financial future.

Compare KiwiSaver funds

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