17 June 2021

KiwiSaver fund switching among younger people – helping out next time volatility hits

By Gillian Boyes
FMA Manager Investor Capability

“I got scared because I didn’t understand how KiwiSaver really works, so I thought I had lost a whole bunch of money and I would never get it back so then I switched immediately to conservative to keep the money that I had and hopefully not lose any more.”

They’re the words of Anna* – a 24-year-old woman we spoke to for our latest research into KiwiSaver switching behaviour during the worst of the COVID-19 turmoil that rocked world sharemarkets in March 2020.

Anna became alarmed when she saw her KiwiSaver balance plunge rapidly, falling by thousands of dollars. Her worries are easy to identify with – they came during a strange and stressful time for all of us — but it’s what happened next that risked setting her finances back further than necessary.  

She joined thousands of other young KiwiSaver members and opted to switch out of her KiwiSaver growth fund and into conservative fund.

The headline numbers presented in our research are significant and have implications for industry.

KiwiSaver members aged 26-35 made five times more fund switches than the same time last year, while overall fund switching more than tripled.

Of all these changes, more than 70% were to more conservative, lower growth funds, while 11% went to equivalent funds and 18.5% to higher growth funds.

Those KiwiSaver members aged 26 to 35 were much more likely to switch to lower growth funds, while the banks saw a disproportionate increase in switching compared to other KiwiSaver providers.

The value of switches made into lower risk funds during this time was $1.2b. But just $121 million was then moved back to higher risk funds — meaning over $1 billion of KiwiSaver funds missed out on the subsequent market rebound.

These raw numbers, along with our associated case study interviews with people like Anna, shine a light on some of the problems faced when it comes to engaging with younger people in KiwiSaver.

KiwiSaver provider communications at the time encouraging investors to ‘stay the course’ don’t appear to have much impact on the decision to switch.

Anna didn’t recall seeing anything in the news about KiwiSaver balances dropping – like many younger people, she gets her news from social media platforms such as Instagram and Facebook.

We also heard that some younger people have a limited understanding of what the different KiwiSaver fund types mean. 

They are comfortable using mobile apps to make financial decisions and often use them to check their KiwiSaver balances.  But it’s this frequent checking that made them more aware of changing balances, which may then have prompted the decision to switch.

There’s also a lack of ‘friction’ in online fund switching, making the whole process pretty quick and easy.

And the importance of good communication in supporting investors’ decisions cannot be overstated – it’s crucial that investors have access to the right information, and that they can easily process it.

Here are some research implications for KiwiSaver providers:

  • Gear up for turbulence. Providers should be prepared for market turbulence and have a set of tools and clear, concise, off-the-shelf communications ready to be used in response.
  • Highlight the risks and unknowns of switching. The balance a KiwiSaver member sees on screen may differ from the price when the switch goes through.
  • Give customers access to commitment devices. Providers could explore making commitment devices such as prompts and notifications available. This could support investors to achieve their long-term savings goals.
  • Follow up with customers. People’s situations and goals change. Providers and advisers should follow up and check in with members.
  • Make informed decision-making easy. Without interfering with members’ ability to manage their own savings, providers should investigate accessible information and interventions that can support this decision- making.
  • Evaluate customer engagement efficacy. Further research is needed to test the impact provider communications have on member behaviour.

While overall the number of KiwiSaver members who switched was relatively small at 3.9 per cent we still think all investors could have benefitted from more support to help reduce anxiety and encourage them to stay the course.

We’ve also learned through this research that KiwiSaver providers don’t always collect data to assess the effectiveness of communications. There is widespread evidence that behaviourally informed customer communications and prompts can increase impact, and it’s relatively straightforward to design trials to test the different types of message or channel.

As Anna points out:
“I wish my provider had put out more comms like a pop-up on the KiwiSaver app that told you what was going on. And in general as well, I wish they had more comms about KiwiSaver. I’ve been with my bank for like 14 years and I have never really had any comms from them about it. So, it would be nice to get an information package or something.”

Things turned out OK for Anna, she talked to her Mum and put her hard- earned KiwiSaver money back into that growth fund two weeks after switching.  Now she’s hoping to use it in around 10 years to help buy her first home.

My wish is the next time world markets and KiwiSaver balances start swinging, people like Anna get a bit more communication and comfort from their KiwiSaver providers.

Download Lockdown: A review of KiwiSaver member behaviour in response to COVID-19

Download KiwiSaver Switching Behaviour: KiwiSaver Member Stories

*Case study name changed for privacy reasons.