Plunging international share markets tested the nerve of KiwiSaver customers earlier this year, new research reveals.
New data from ASB shows that six percent of the bank's KiwiSaver customers switched to lower risk cash and conservative funds in March - that's when the full brunt of the COVID-19 pandemic began to hit, countries began locking down, and many markets went into a spiral.
There were countless stories at the time about markets around the world, including in New Zealand, opening with massive drops and it wasn't long before KiwiSaver balances were affected.
"2020 has been a reminder of the perils of trying to time the markets. For many KiwiSaver members, this was their first real experience of severe market volatility," said senior economist Chris Tennent-Brown.
"Given ASB’s diversified KiwiSaver funds recorded the best calendar year returns ever in 2019, it’s understandable many were unsettled by watching their fund balances drop significantly in March. However this also demonstrates the importance of customers being clear about their investment goals and timeframes, and sticking to them."
While some people decided to move out of growth funds, Tennent-Brown said others stopped saving or held back on making investment decisions.
Voluntary lump sum contributions to ASB's scheme dropped significantly in March and are yet to return to pre-COVID-19 levels. The value of contributions initially dropped by two-thirds and are still down a third on the value prior to the market volatility.
"The experience may have convinced some customers that higher risk funds are not for them, but many others have not made a decision about what to do, and are still on the side lines in the cash or conservative funds."
Some investors have also missed out on the relatively quick recovery seen from April onwards.
Compared with previous major financial crises - like the 2008 Global Financial Crisis - ASB says the volatility seen in the early days of the pandemic "abated quickly". While share markets dropped 30 percent or more in February and March, they "recovered rapidly" and some have even hit new heights.
"During the Global Financial Crisis KiwiSaver was relatively new, balances were significantly smaller and customers’ own contributions made the biggest difference to their investment value," said Tennent-Brown.
"Now the market movements tend to be a bigger influence on many customers’ balances, and KiwiSavers notice this."
The economist said that despite market movements or volatility, KiwiSaver customers should continue to contribute as it's a combination of regular payments as well as being in the right fund for the customers' goals and timeframe that will determine how much they have for retirement.
"It's understandable if people stop saving to manage cashflow in times like this, but for those that can afford it, it’s useful to think about getting more for your money when prices are low.
"Keeping regular KiwiSaver contributions going means customers benefit even more when markets recover."
The research also found a record 27 percent of respondents ranked their knowledge and understanding of KiwiSaver as high, up from 22 percent a year ago. That coincided with an increase in the number of times people were checking their KiwiSaver, with 38 percent checking their balance fortnightly or more, up from 35 percent last quarter and 31 percent in the first quarter of the year.
"The improvement is pleasing, but there is still a long way to go. A significant number of people still describe their knowledge of KiwiSaver as poor, and as we saw around March, a significant number of people aren’t sure what to do when markets get volatile," said Tennent-Brown.
"But if nothing else, the volatility this year seems to have lifted engagement. What’s most pleasing to see over recent months has been the recovery in balances for people that stuck with their strategies and kept on making their regular contributions."