The FSC wants them as an option for people who are close to withdrawing money for a home, or retirement, to allow them to move out of conservative funds.

“We asked Infometrics to calculate the cost of guarantees that would ensure someone who was defaulted into a balanced or growth fund was protected against a major financial market downturn, especially when close to either retiring or withdrawing funds to buy their first home,” chief executive Peter Neilson said.

The Infometrics report said that if someone knew in advance that they wanted to buy a house in their 12th year of savings, they could pay a single premium in the 11th year to insure against a negative return.

“That premium would be 1% of the balance in year 11. For someone on the mean wage the corresponding dollar amount fee would be about $700. Expressed in relation to the contribution rate the proportionate increase would be about 15%, raising the contribution rate from 7.60% to 8.74% in the case of a balanced portfolio for that one year.”

It said another option would be to spread the premium over 20 years, the period over which most KiwiSavers would purchase a house.

“For someone in a balanced portfolio who purchases a house in year 12, their contribution rate would need to rise from 7.60% to 7.65%, an additional 0.05% contribution each year for 20 years, to protect themselves against the possibility of one to three years of negative returns prior to house purchase.”

Ralph Stewart, managing director, of NZ Income Guarantee said the FSC’s comments were a welcome contribution to the retirement savings debate.  “Little attention has been given to the systemic risks associated with retirement savings being eroded by unknown investment returns and retirement savings lasting over an unknown life expectancy.”

He said the FSC approach could be compared to products offered overseas, called guaranteed minimum accumulation benefits (GMAB).

“The costs quoted in the report are low in our experience. They do not factor the cost of capital to the provider or any additional volatility created by aggressive investment strategies. The annual cost of a GMAB in the US in the fourth quarter of 2011 was 0.25% to 1.95%.”

John Berry, of Pathfinder Asset Management, said guarantee products were often structured so they de-risked in years when markets turned.

“One way to look at it is the average return on a growth fund is 6.6% compared to a conservative 4%, that’s 2.6% difference. If someone offered a guarantee for 1% per annum, that when they fall you won’t lose money, that would seem like a good idea.”

He said innovation that offered KiwiSavers more choice should be supported.