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Six into one doesn’t add up

Replacing the six KiwiSaver default schemes with a single, low-cost scheme would mean dismantling “the most successful public/private partnership in this country’s history”, according to Tower Investments CEO Sam Stubbs.

Thursday, February 3rd 2011, 7:34AM 14 Comments

by Benn Bathgate

Speaking in the wake of the Saving Working Group's recommendations for encouraging greater saving among New Zealanders, Stubbs said he thought it was unlikely the current system of six default schemes would be changed.

The report recommended the creation of a single fund to reduce costs, fees and expenses in an effort to boost investment returns.

 "I don't think the Government is going to be interested in nationalising one of the most successful public/private partnerships in New Zealand," he said.

"Why would the Government want to change it?"

Stubbs was also adamant that in its current incarnation, the funds were already low cost and offered excellent value.

"Default schemes are already the lowest cost saving schemes in the industry by far, not a little bit."

He also said a lower cost scheme, achieved through indexing, would provide lower investment returns over time and that the SWG, "forgot to mention how much lower returns people will get - this is not theory, this is fact."

Another area where Stubbs disagreed with the SWG was their recommendation against KiwiSaver compulsion.

Stubbs believes the arguments for compulsion mean "it's not a matter of if but when," with the most telling argument being, "the people who need KiwiSaver the most are not involved."

There are some aspects of the report Stubbs was positive on.

He backs the calls for increasing the default rates of contribution and for the development of an annuities market, a recommendation he said recognised the need to be "thinking about the whole lifecycle of savings."

However, he acknowledged the difficulty in pricing annuities and said they work best when people are compelled to have them, citing the UK example.

Not only does that provide the scale necessary but it helps ensure the viability of the annuity providers - essential if people are to have the confidence to invest their retirement savings.

He also said the existence of just one default scheme would prove a disincentive to providers from entering an annuities market.

However, with the creation of an annuities market also a potential boon for fund managers, he said the issues were by no means insurmountable as, "the market is going to be very good at providing these solutions."

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to

« KiwiSaver compulsion not recommended ‘at this time’ - SWGKiwiSaver mismatch a 'huge challenge' for advisers »

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Comments from our readers

On 3 February 2011 at 8:00 am denis said:
I would love to hear the factual evidence that active management outperforms indexing. I am not being sarky -it's a dilemma for lots of investors. If Sam has the facts, then let's hear them and sort this out once and for all.
On 3 February 2011 at 8:08 am Fred said:
Sam has a point. There would not be much point in the additional financial education the SWG suggested, to provide only a monopoly.
More meaningfully, fees divided by returns would give a ratio of value-added, akin to the Sharpe Ratio.
On 3 February 2011 at 10:20 am Independent Observer said:
The jury is out as to whether index or active management adds the most value.

The imperial evidence suggests that they both contribute at various times of the cycle (with many active managers suggesting that they have the ability to add value throughout all market conditions). In the end it is up to the consumer (and their advisers) to determine the most appropriate perspective to suit the consumer’s needs.

To compress the six default Kiwisaver funds into a single entity would remove the consumer’s ability for choice. This ‘one size fits all’ approach will have significant individual issues – as well as heightening the level of systemic risk (ie: what is the impact on society if the proposed single entity gets it wrong?).

Choice is a good thing. Refrain from tinkering with the real objective - which is to get folks saving for their own retirement.
On 3 February 2011 at 10:42 am Dave said:
Not sure why everyone is so keen on developing a traditional annuities market in NZ. As well as the way they are taxed there is also the fact that they are locked so that you can't leave or even switch providers - in fact the only way out is to die - and when you die the provider retains what's left of your investment for the benefit of the remaining annuitants in the pool (so nothing is passed to your estate). I also wouldn't be citing the UK example because come April this year annuities will no longer be compulsory - not exactly a ringing endorsement of compulsary annuitisation.
On 3 February 2011 at 11:14 am BTW said:
Sam has no point - and is, understandably, about self preservation.
Having one default provider is so blindly obvious its child-like in its simplicity. Anything else is a sop to the corruption and old boys network that is the so-called "public/private partnership" in NZ. If consumers want private alternatives - fine - but we only need one (1) default provider.
On 3 February 2011 at 11:14 am Forthright said:
Let’s dispel one myth; most KiwiSavers end up in a default scheme by default not choice. I also imagine the NZ Superannuation Fund would be the logical choice for a single default provider. Index verses Active /Absolute return. Index funds outperform up markets and down markets 0% of the time. Active / Absolute return top quartile managers performance for MSCI, outperform up markets 65% of the time and down markets 71% of the time. It’s obvious you don’t want to be in an index fund during down markets. However the best performance comes from funds managed on an absolute return with minimisation of risk basis.
On 3 February 2011 at 6:14 pm Bob said:
Both BTW and Forthright are spot on.

The default providers are providing a cash-like return less frictional costs and that is plain dumb both for the individual and the economy. It is only good for the providers. Our country has built a very competent asset management team in the Super Fund who could quite competently manage a default scheme to a conservative and liquid mandate without having to carry a profit motive. If individuals want choice they can opt for whichever non-default provider pleases them.

And Independent Observer is confused (not just about the difference between "imperial" and "empirical") as choice has been proven empirically to detract from investor's ability to capture long run asset market returns. That is the one of the bases of behavioural finance. All other things being equal, choice is economically bad, not good.

And while we are on it, it is mathematically highly probable that the average return of all passive strategies in any asset class will closely equate to the average return of all active strategies within that same asset class (both net of costs) assuming that they collectively form the bulk of capital in each asset class and private investors on average underperform professional investors. At least with active management you have a chance.
On 3 February 2011 at 9:46 pm albert k said:
The concept of KiwiSaver is great, however, I think the currrent one is not well structured / planned.

Personally, I would say changes will definately have to be made to encourage savings.
1. Make it compulsory, but contributions should be before tax, not after tax. Drop the govt contribution of up to $1040 a year to offset the impact of a lower tax take.
2. Start with 4% from employee and 1% from employer, gradually increasing it to 8% (employee) & 4% (employer).
3. Options on KiwiSaver:
a) Invest in managed funds (capital not guaranteed by govt)
b) Invest in tax-free returns govt bonds (capital + returns guaranteed by govt). Govt can use this monies for building infrastructure, etc.
c) Use for mortgage repayment / deposit for owner occupy homes only (not guaranteed by govt).
Currently, there is not choice. Choosing between management funds is not a choice, it is the same type of investment vehicle.
4. Funds in KiwiSaver to be protected from creditors and matrimonial split up.

On 4 February 2011 at 8:08 am John said:
Active management can add value.

During 2010 money held in CASH could have earned 2.27% in a call account with no fees. However, it could have earned 3.83% or 4.45% after fees with two of the big wholesale fund managers that charge 20 to 25 basis points. A fixation with low fees would have meant a 2% lower after-fee return to members.

NZ has a shallow stock market where almost all active managers beat the passive index by underweighting Telecom and avoiding dogs. Active management costs money but also makes much more money than the extra fees. If you hold down fees managers will not spend sufficient time conserving value.

On 4 February 2011 at 9:05 am Zoltan said:
The fs industry has wrung its hands for at least the last 25 years over annuities. It seems that it is bereft of innovative ideas for the asset rich cash poor baby boomer mass market adoption. Put up or shut up!
On 4 February 2011 at 2:11 pm denis said:
Yes - active managers can and do out-perform the index. The trouble is it's not always the same ones! No one active fund manager can seem to consistently out-perform index returns at all the times over all periods.

If there was, then I'm sure they would tell us and everyone will be investing with them.

It's not fair to claim, on behalf of all active managers collective success in comparison to index-tracking funds. I think this is what some people are doing when they champion active management.

You can't invest in all of the active managers (think of the fees!) and then select retrospectively the one that happened to out-perform.

On 4 February 2011 at 3:21 pm Independent Observer said:
Bob - you are correct in pointing out my Freudian slip between "imperial" and "empirical”, however you may have mis-interpreted the real intention of my response.

The compression of the various default Kiwisaver providers into a single entity removes consumers right to choice, and exposes the Kiwisaver program to a significant systemic risk. You can’t take away or restrict that fundamental right.

Whilst I am a strong advocate for active management, consumers must have choice available when constructing their retirement nest-egg. The current number of default managers is woefully small, and should be expanded (not contracted) to include a variety of investment capabilities with a variety of risk profiles and price arrangements.
On 7 February 2011 at 8:13 am Stephen Ladanyi said:
IO - how does consolidating Kiwisaver default providers reduce consumer choice? A default provider is one assigned to a consumer by the state when the consumer has not chosen their own provider at the get go.

Having multiple default providers was originally predicated on ideas such as: the state shouldn't be the default investment manager; share the dosh round a small number of private sector managers (to mitigate investment management risk). Reducing the number if default providers to one tips these ideas on their head - you may as well give all the money to the Guardians or ACC investment teams to manage!
On 7 February 2011 at 3:18 pm Independent Observer said:
Stephen Ladanyi I’m unsure of your argument.

You start by appearing to be pro-consolidation, then go on to appear pro-choice.

In case you missed my point – I’m pro-choice.
Commenting is closed



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