KiwiSaver investors are taking on more risk, what it could mean for the next crisis

KiwiSaver investors are taking on more risk. What it could mean for the next crisis.

2008, 2000, 1997 and 1987 are all periods that are etched in investors' memories. Starting out working in markets not long after the 2008 downturn, I walked into a market where US equities were maligned, investing in bonds was in vogue, and cash was king. The numbers later in this article will show you why. How things have changed.

While I don’t doubt many of the changes we've seen in KiwiSaver over the past decade have been the right thing, such as changing the default option from conservative funds to balanced ones, some trends are converging which I think are worth paying close attention to.

But before we dig into this, let’s take a quick lesson from a scene in the Paddington Bear movie that my kids absolutely love. Mr Brown, a risk analyst no less, is on the phone urgently racing to lock in insurance cover for having a bear in the house, before Paddington floods the bathroom upstairs. It gets a laugh every time in our house (almost as much as the haircut scene in Paddington 2). It is also a pretty good description of how most investors approach risk and diversification. Nobody thinks about it while the bath is filling up, but everybody wants it once the water starts coming through the ceiling.

I do worry, however, that when it comes to risk, KiwiSaver members may not appreciate just how full the bath has become.

We are taking on more risk

Over the past ten years, KiwiSaver investors have taken more risk in their portfolios.

A decade ago, growth and aggressive funds, as defined in the Morningstar KiwiSaver Survey, held a combined 29.6% of total KiwiSaver investors’ funds under management.  Today that number is close to double, at 54.9%. 

But the increase in risk does not stop there.  The second shift is inside each type of diversified fund peer group, and it gets less attention. KiwiSaver balanced funds in 2016 on average held 53.2% in growth assets like global and New Zealand equities, while today they hold 58%. Diversified growth funds have gone from 70.2% to 74%, and aggressive funds have gone from 85.1% to 95%. While the labels have stayed the same, the portfolios behind them have been drifting more towards growth assets.

Some of this is deliberate and defensible. The default change in 2021 did real work, moving default investors from conservative to balanced. Some of it is simply the arithmetic of a bull market. Over the ten years to June 2026 the aggressive category returned 10.3% per annum against 4.1% for the conservative category, so the growth in money has compounded into a larger proportion of the total pool of assets regardless of whether a single member switches. Risk has been rewarded, and reward has bred more risk.

Below we look at the proportion of KiwiSaver in each fund type, then we look at the amount of growth assets within each fund type.

Source: Morningstar KiwiSaver Survey, June 2016; Morningstar KiwiSaver 360, June 2026. Shares are of multisector funds only. Default options sit within Conservative in 2016 and within Balanced in 2026.

Most of our risk is in the global equity market

Here is the part that interests me more. It isn't just that we hold more growth assets, it is that the growth assets we hold have become less diversified than they were in the past.

Across the whole KiwiSaver system, growth assets rose from 45% to 64% over the decade, a 19 percentage point increase in absolute terms. International shares rose from 25.7% to 45.4%, an almost 20 percentage point increase. In other words, every single percentage point of added risk went into one asset class, being global shares.

Everything that might have diversified that exposure went backwards. Exposure to listed local and global property fell from 4.3% to 1.9%. The "other" line, where alternatives like private equity would show up, fell from 1.3% to 0.4%. Only NZ unlisted property rose, NZ 0.5% to 0.9%, and yet that is still a rounding error.

Global equities now make up three-quarters of KiwiSaver's total equity exposure, up from two-thirds. A single asset class now accounts for 45 cents of every dollar of New Zealand's retirement savings.

Source: Morningstar estimated KiwiSaver market asset allocation, June 2016 and June 2026.

Now compare that with Australia. Australian super has also gone global as the savings pool scaled; it used that scale to buy diversification by investing in asset classes such as unlisted infrastructure, unlisted property, private equity, and private credit. Whereas KiwiSaver has scaled from $33 billion to $148 billion and bought more global equities as a portion of the total savings pool.

As can be seen below, Australian Superannuation Funds hold almost 15 percentage points more in Private Assets and Alternatives than KiwiSaver Funds. Their default product goes further still. In Australia, MySuper holds 11% in infrastructure, 6% in unlisted private equity and 5% in unlisted property, which puts more than a fifth of Australia's default retirement savings in unlisted and alternative assets.

Sources: Morningstar KiwiSaver 360, June 2026; ASFA Super Stats (September 2026), citing APRA quarterly superannuation statistics for the June 2026 quarter. Domestic Shares for NZ include NZ and Australian. Infrastructure in the APRA survey is assumed to be unlisted.

The gap is not a rounding difference, and it is not explained by Australia being a more growth-oriented system.  This is reflected by the fact that their total listed equity weighting is lower than ours.

But you don’t necessarily have to cross the Tasman to find the contrast. The NZ Superannuation Fund holds around a quarter of its portfolio in a range of private markets and alternatives investments, ranging from timberlands, liquid alternatives, private equity, venture capital, carbon credits, real estate and infrastructure.  At the Government Superannuation Fund, managed by Annuitas, their target portfolio has almost 23% allocated to global private equity, NZ private equity, catastrophe risk and life settlements.

Certainly, in our own work at Aurellan with wholesale and institutional investors, we have been adding return streams that are less correlated with global equities to make portfolios more resilient.

How would each fund fare in previous downturns?

This brings us to the risk. KiwiSaver funds have become more reliant on global shares just as the global share market itself has become more concentrated. The diversification we thought we were buying has been quietly withdrawn from under us.

The numbers over the same decade are remarkable. The top 10 holdings of the MSCI World accounted for around 8% of the index ten years ago. Today that number is around 25%, with the US weight around 70%. Robeco frames this well, highlighting that the effective number of stocks driving the majority of the performance of the MSCI World Index has fallen from more than 300 in 2005 to 84 in October 2025. The market may contain thousands of listed companies, but owning the index has increasingly resembled owning just a few.

So, a member in a KiwiSaver growth fund today holds more equity, more of it offshore, and that offshore equity exposure is itself the most concentrated it has been in fifty years. Three trends are compounding in the same direction.

The question worth asking is not whether this has worked. It plainly has. The question is what it does to the downside. A useful exercise we do with our clients is to provide portfolio stress tests (on the upside and downside) on a forward and backward-looking basis to help determine actual risk tolerance.

Some examples of backward-looking downside stress tests are shown below as well as explanations of each scenario. These are not doomsday predictions; they are actual index returns applied to current KiwiSaver asset allocations.  It shows that, for example, using today’s asset allocations of the average aggressive fund, returns would have been down by 37% peak to trough in the Global Financial Crisis or down 29% during the tech bubble. Interestingly in both crises, it would have taken the investor over five years to recover their original capital they had heading into each of the crises.

The tech bubble sell-off lasted from early 2000 to early 2002. Even with dividends reinvested, an investment in the Nasdaq-100 bottomed on 9 October 2002 at an 83% decline from its March 2000 peak. While the fall in markets took the escalator, unfortunately the recovery took the stairs. With dividends reinvested, the investment first returned to even in February 2015, nearly 15 years after the purchase. And even that didn't last: it slipped back below its starting value repeatedly over the following 16 months before moving above it for good in mid-2016. The investor who bought the market leaders of 2000 waited 15 years just to get their money back. Even then, a broad S&P 500 fund bought at the same time had done a little better.

In the Global Financial Crisis the S&P 500 fell 55% from its October 2007 peak to March 2009. Yet a diversified investor was only back to even by March 2012, about four and a half years after the peak. Banks, the market's largest sector going into the crisis, fared far worse. European banks fell 82% on a total return basis, against 59% for the broader European market, and US financials fell 83%. US financials took around a decade to regain their 2007 peak. European banks took around 18 years and only got there after strong gains in 2024 and 2025.

Source: Morningstar KiwiSaver 360, June 2026; asset class splits estimated by Aurellan by applying the market-wide asset mix to each peer group's growth-asset share. Some assumptions around index use and hedging percentages have been made as these are not uniform across funds. Returns are gross of fees and tax.

The tech bubble case deserves particular attention. It was a drawdown concentrated in exactly the part of the market that has come to dominate the index, and one where NZ equities, listed property and cash did most of the diversifying work. In today’s portfolios, those are the allocations that have shrunk.

Conclusion

None of this is an argument for going back to conservative default funds. Higher growth allocations for members with thirty years ahead of them are the right call, and the last decade has borne this out.

It is an argument about the composition of that risk, not the quantity. We have concentrated an entire nation's retirement savings into a single factor, global listed equity beta, at the precise moment that factor became the most concentrated it has been in living memory. And we have funded that concentration at the expense of diversification.

The obvious focus for the industry is to look at how we can provide KiwiSaver investors with greater diversification within the growth parts of their portfolios beyond traditional listed global and local equities.  The Australian industry provides us with a great place to start looking at how they have introduced greater diversification into their nation’s long-term saving pool as have some of NZ’s largest long-term investors.

For now, the bath is filling and the water isn't on the floor, yet. Returns have been excellent, members are better off, and it feels like there is no crisis to respond to. That is exactly why now is the time to look at it. The funds that handle the next downturn well will be the ones that do the work before the crisis starts. Mr Brown, a risk analyst by trade, would approve.