Since it was first introduced in 2007, KiwiSaver has undergone several changes. It is about to change again. On 1 December this year, the number of default KiwiSaver funds will reduce from seven to six. The AMP, ASB and ANZ funds will cease to be default funds while Simplicity and SmartShares will be added to the list of default funds. They will join BNZ, Booster, BT Funds and KiwiWealth to make up the six default funds.

It doesn’t stop there. Members of default funds will be moved from Conservative Funds to Balanced Funds, and the new default providers will be required to not invest in fossil fuel production or illegal weapons. Overall, a very significant amount of KiwiSaver money (around $10 billion) will be moving between providers and between Conservative and Balanced funds on 1 December.

The two new default funds, Simplicity and SmartShares, are passive investment funds. This means they track market indices rather than picking investments using research. Passive funds are lower in cost as there is no research required, just an administrative function to keep them aligned with the indices. Members of these funds will pay lower fees, but with a different investment outcome, which may at times be either better or worse than actively managed funds.

What does all this mean? Firstly, if you are not in a default fund, you will not be affected by these changes. Members of default funds are those people who have not chosen a KiwiSaver fund but who have been randomly allocated to a fund when they first joined. If you have completed an application form for a KiwiSaver fund then you are probably not in a default fund.

Until now, members joining default funds were automatically put into Conservative funds, which have little or no exposure to shares. The reasoning behind this is that without an understanding of the investor, this is the safest option. Conservative funds are mostly invested in stable assets such as cash and bonds. For some time now, financial advisers have been arguing for this policy to change. The people most likely to go into default funds are young people starting their first job and people who have a lower level of financial literacy. Young people will be KiwiSaver members for a very long time, and we know that over the long term, staying in a Conservative fund leads to a significantly reduced investment return when compared to a Balanced fund. This can mean the difference between a comfortable retirement and a miserable one.

However, not everyone is suited to be in a Balanced fund. For example, a young person who intends to use their KiwiSaver funds to buy a first home within the next couple of years may wish to have their funds in a stable Conservative fund rather than be exposed to the volatility of a Balanced fund. Similarly, someone close to retirement age who wishes to withdraw their funds as soon as they are eligible to pay off a mortgage may also be best in a Conservative fund.

Whether you are in a default KiwiSaver fund or not, now is a good time to review the fund you are in. The key things to look for are:

• Who is your provider and how has their performance been compared to other providers? (Note that performance is the net return after fees). There is a very good tool on the Sorted website for doing this comparison.
• Is your fund a passive fund or an actively managed fund?
• Is your choice of investment option suited to your investment time frame? The investment time frame is the time at which you wish to withdraw your money to spend it, which may be well before or well after retirement.
• What is the ethical investment policy of your fund?
• Check the tax rate (Prescribed Investor Rate) you have nominated to make sure it is still appropriate, as the tax you pay on KiwiSaver is a final tax. If you are paying tax at too high a rate, there are no refunds!