By Gillian Boyes, Investor Capability Manager
First published by NZ Herald on 14 June 2020
KiwiSaver, the central pillar of our country's retirement savings system, has been hit with the biggest challenge of its 13-year life, after a long period of sustained high returns and buoyant world sharemarkets.
KiwiSaver was last hit like this in the wake of the Great Financial Crisis in 2008. At that time, average balances were quite low because KiwiSaver was relatively new.
Balances are now generally higher, which means a 10 per cent fall in your KiwiSaver balance is more likely measured in the thousands of dollars, rather than hundreds.
The volatility that prompted the losses people saw in March has been followed by a pretty strong bounce-back in global and local sharemarkets. But we can't say with any certainty how long that will last.
The world is not out of the Covid-19 woods by any stretch. It's unclear when a vaccine might become available and when industries like tourism and aviation can get back on their feet.
But it is a good time to take a look at how KiwiSaver has faced its biggest test so far.
Providers had to deal with the intense volatility in global markets impacting their funds, and a massive increase in calls and emails from their investors. KiwiSaver investors were used to seeing their balances going in one direction –upwards – so it was a major shock to watch their funds fall in their mobile apps.
But since those big dips in world sharemarkets in February and March, growth funds and shares have regained much of that lost ground. We saw KiwiSaver providers talking to their customers and keeping them informed through the worst of the panic.
Importantly, KiwiSaver providers have managed the pressures well. As the market regulator, the FMA has not detected any problems with the stability of any KiwiSaver schemes.
While some KiwiSaver members wanted to withdraw their money, we have yet to see any big increase in the number of significant financial hardship withdrawals from KiwiSaver schemes.
KiwiSaver members have taken on board the advice that they should consider other financial options and avoid dipping into their retirement savings available as a last resort.
A period of economic contraction appears likely across the world, though for how long isn't clear. So what does that mean for you and your KiwiSaver?
Keep money going into KiwiSaver if your situation allows. It's just as important now as it was before, as continued, regular contributions can help smooth over the ups and downs of world markets.
But this doesn't mean you should ignore these tough past few months. This period of financial volatility is a perfect time to reassess your KiwiSaver settings.
If you're going to need the money in the next few years, a conservative or cash fund may suit you better. If retirement or a first home deposit isn't needed for 10 years or more, then a growth fund is usually a better long-term option – provided you accept the fact that your balance will move up and down with the markets. It's also a good time to check on your KiwiSaver provider's investment philosophy and fees – you might find someone else suits you better.
Over the past few weeks, KiwiSaver providers have been sending annual statements to all KiwiSaver members. These now include information on how much money you are estimated to receive when you retire. It's worth taking a look at your statement to see if you're on track.
If your income has been cut, or you've lost your job as a result of Covid-19, then you might be able to reduce your contributions or take a KiwiSaver savings suspension, for up to a year at a time.
But if you need to stop contributing for a while, remember to start again. Your employer won't contribute to your KiwiSaver fund unless you do. And you'll also miss out on the Government's contributions if you're not putting money in.
What you don't put in now might make a big difference in retirement.
With employment and economic growth now looking less secure than at any time in the past decade, having savings set aside for retirement might turn out to be more significant than ever.
Disruptions and volatility will probably hit KiwiSaver balances again before many of us retire, so it's reassuring to know that one of the main building blocks of New Zealand's financial system has stood up to its first big test so well.