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Disappointment lifestages not adopted for default funds

A Government decision not to introduce a “life stages” approach for KiwiSaver default investment funds has been criticised by the industry.

Friday, October 18th 2013, 7:10AM 7 Comments

Financial Services Council chief executive Peter Neilson said the decision to stick with default schemes investing conservatively would mean New Zealanders had to save more, for longer, and pay more tax.

He said it was a missed opportunity and the OECD had provided information on how guarantees could be provided if the Government was wary of risk.

“Many people who have enrolled into KiwiSaver have defaulted into conservative funds without making an active choice to be there…If someone on the average wage contributing 6% pa stays in a conservative fund for the next 40 years they’ll end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio, $250,000 less than being in a growth fund. Investors also need to know that conservative funds suffer the highest effective tax rate which increases the savings required to get to a comfortable retirement.”

Other changes as a result of the default scheme review, which started last year, include the requirement that default providers offer investment education and impartial financial advice.

Finance Minister Bill English said:  “It is vital we continue to build on KiwiSaver’s contribution to developing a savings culture and lifting New Zealanders’ confidence in our financial sector.”

The Government will run another tender to appoint up to 10 default providers for the next seven-year term, beginning in the middle of next year.

The tender selection criteria will be the same as it was in 2006, except that providers will now also have to demonstrate how they will offer investor education to encourage default members to actively choose which fund they should be in.

ANZ Wealth managing director John Body said the review had delivered certainty but ANZ was disappointed that the life cycle approach had not been adopted. But he said other changes might address some of the problems. “The requirement in future for providers to raise the level of education and financial advice is likely to see younger members choosing to move away from conservative funds earlier in their savings lifetime anyway.”

ANZ would apply for another seven years as a default provider.

“It's best to have a small number of tightly-regulated default providers with strong standards that set the bar for the industry. There needs to be a sufficient number for competition and innovation while at the same time allowing scale to generate lower costs for members. We'll see what happens through the tender process in terms of the final number of defaults.”

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Comments from our readers

On 18 October 2013 at 8:36 am Fred said:
The government has got this one right.
It would be immoral for IRD to direct savers into bank's clutches & decisions without informed choice.
Education & Financial Advice is the proper course.
Good work!
On 18 October 2013 at 9:35 am Brent Sheather said:
Dear Mr English & Mr Foss

Your decision to stick with the asset allocation of the default Kiwisaver schemes has been criticised by the finance sector so I thought I would send you an email in support of your decision. Many Kiwisaver investors are deeply suspicious of things financial and would hate to see that after two or three years of saving that their Kiwisaver balances are less than what they have contributed so staying with a conservative approach is very good sense. One important conclusion of behavioural finance theory is that investors dislike losing more than they like winning and the current approach is consistent with that reality.

I have no doubt that those individuals that are more interested in investment related matters will make their own transition to more aggressive asset allocations and you have rightly determined that this decision is for the individual rather than the Government. We all know that the reason that institutions like the Financial Services Council are advocating more aggressive portfolios is that they can earn higher fees from equities rather than bonds so you are to be congratulated for ignoring their self-interested comment.

If the investment sector were genuinely interested in maximising peoples’ savings outcome they would not be charging fees that in many cases effectively deliver, after fees, the risk of equities with the return of bonds.

Brent Sheather
On 18 October 2013 at 1:48 pm RFA and loving it said:
Just to stir the pot....

Fred, what % of KS funds are administered by the banks? So they already have their "clutches" on the money. In fact, how much of the cash component of those default funds is being used by those same banks to top up their funding? LOL.

Brent, if people hate losing more than they like gaining then would not a default fund that is stuck with huge bond holdings in a rising interest market be the worst place to be? ROFLOL.

OK so you can produce a highly technical argument for it based on behavioural finance theory and long positions vs short and market cycles and other awesome theories. But the deeply suspicious punter will just see their "conservative" fund "losing money". Meanwhile, over in the equity funds...

BTW, after their conservative fund has performed as a conservative fund will over the next three years, EVERYONE who was not 'more interested in investment related matters' suddenly will be. PMSL.
On 18 October 2013 at 11:38 pm traveller said:
Forget fund managers. Research and do it youself
On 19 October 2013 at 12:37 pm Kimble said:
"One important conclusion of behavioural finance theory is that investors dislike losing more than they like winning and the current approach is consistent with that reality."

The asymmetry of investors utility is an observable reality, but that doesn't mean policies pandering to it are necessarily correct.

"If the investment sector were genuinely interested in maximising peoples’ savings outcome they would not be charging fees that..."

... aren't tied to any benefit to the end investor. Such as forcing uneducated, trusting clients to pay more in fees than they need to in order to "maintain the efficiency of the market". When (1) their share of that efficiency gain is practically non-existent, (2) their contribution to the effort is similarly, infinitely small, and (3) where that market efficiency is almost always provided to them for free anyway.
On 19 October 2013 at 2:37 pm Brian said:
I would have thought that the life stages bit was not the big thing to contemplate. Isn't the big news here the requirement for Default Providers.

Can someone walk me through the current default providers' different business models and explain how they are going to provide impartial investment advice to people with relatively small balances.
On 21 October 2013 at 8:49 am Satisfied industry said:
The FSC represents a view, but it is not a consensus view. There are plenty of providers who are comfortable with the status quo conservative model. Remember that default funds are an initial holding pen - the onus is on the providers to educate investors and help them invest in a fund appropriate to their own risk profile. This does not necessarily align with a fund chosen purely on age.

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