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Default KiwiSaver scheme set for overhaul

Default KiwiSaver schemes may no longer be conservative, and could be forced to charge lower fees, if Government proposals for a revamp of the scheme are adopted.

Wednesday, August 7th 2019, 9:18PM 2 Comments

The Ministry of Business, Innovation and Employment (MBIE) has released a discussion document as consultation opens on the KiwiSaver default fund system.

MBIE noted that there were about 715,000 people in default funds, 430,000 of whom had not made an active choice to be there.

That represented about 15% of all KiwiSaver members.

But there are concerns that the settings of default funds mean that those members will not achieve the retirement savings outcomes they could in another fund.

One of the proposals is to adjust the risk settings of a conservative fund.

MBIE said the current investment mandate reflected the idea that the default fund had been expected to be a transitional "parking space" for members. "It was assumed that an ability to earn higher returns under a more growth‐oriented approach would encourage members to move out of the default funds."

But that had not happened.

The discussion document suggested either moving to a "life stages", balanced or growth mandate. 

“The conservative risk setting was intended as an interim arrangement for members while they considered moving to another fund. However, after over 10 years of the KiwiSaver scheme large numbers of people are staying in default funds, despite the potential gains from moving to a higher-growth fund," MBIE manager of financial markets Sharon Corbett said.

The paper said the Government would probably set the investment mandate for each stage of a life stages approach and the age at which each would apply.

"In this regard, we have received informal feedback that a conservative final stage would be too conservative for those approaching retirement, given average life expectancy is much higher than the retirement age. This could be mitigated by increasing the age at which members are switched to the final stage, or making the stages less conservative."

Another option would be to have an initial conservative period during which providers would engage with members to determine their needs.

MBIE said a change away from conservative default funds could affect those who wanted to buy a first home.

"Those individuals could be exposed to negative effects on retirement balances if they withdraw funds when the market is in a down‐cycle. However, the chance of actual losses remains fairly low ... for many people, any negative consequences in the short term would be less significant than the long‐term benefits of a higher‐growth fund."

More than 84% of first-home withdrawals were from members who actively joined their KiwiSaver provider, MBIE said.

Corbett said another proposal was to reduce default provider fees.

“Over time, fees can make a big difference in the amount of money people will have to retire with. We’re seeking feedback on the value members get from the fees they pay.”

MBIE noted that it would expect to see percentage-based fees decrease as FUM grew.

"In relation to KiwiSaver fees in general, the FMA has stated publicly that ‘we would have hoped that as funds under management grew, we would have seen fees decline faster, and that members would be getting advantages of economies of scale that come with growth’. In addition, we have had feedback that some fund managers with active approaches are more active than others, with fees not always justified.

"While we accept that fees are only one component of a value‐for‐money service, we want to see reductions in fees for default funds as a result of this review and subsequent procurement process. Default providers get a steady stream of new customers and reputational benefits as a result of being a default provider. Given these benefits, the Government expects that providers will offer more competitive fees in order to enhance outcomes for members."

Options for fees included a Government-set fee for default providers – though MBIE noted it could be difficult for the Government to set this in a way that was not too high.

Alternatives were considering fees in the procurement process to select default providers, requiring percentage-based fees to drop over time, prohibiting fees for those aged under 18 or with low balances, or banning annual fees.

MBIE is also asking whether the number of KiwiSaver default providers is right, whether default provider should be used to promote investment and how settings could be used to develop capital markets.

Consultation is open until September 18.

 

 

 

 

Tags: default funds KiwiSaver MBIE MoBIE

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Comments from our readers

On 12 August 2019 at 9:39 pm Michael Gray said:
It is worth noting that the OECD has recommended, amongst other things: that the design of DC pension plans are internally coherent between the accumulation and pay-out phases and with the overall pension system; and consider establishing default life-cycle investment strategies as a default option to protect people close to retirement against extreme negative outcomes.

The OECD Core Principles of Private Pension Regulation emphasised that the objective is to generate retirement income. (Much like the old style Defined Benefit schemes?!)

Most importantly, investment strategies should be aligned with this objective and implement sound risk management practices such as diversification and asset-liability matching.

This points to a Goals-Based Investment Solution, implemented via a Target Date Fund, noting there is role for annuities in managing longevity risk, and this market should be encouraged to develop.
On 13 August 2019 at 8:15 am MPT Heretic said:
I wonder if this review will include highlighting the fact that it was MBIE that forced default providers to only use conservative (read basically cash) portfolios as their default option and therefore destroy value for literally hundreds of thousands of Kiwi's. When KiwiSaver was first established the providers argued that a default conservative allocation was a poor base case scenario but unfortunately those making the investment decision for so many had no professional investment experience, were suffering from recency bias due to the GFC and didn't want their fledgling KiwiSaver to suffer if investors saw a negative return in the early days.

So now they are looking to chase past returns by moving the majority of those investors into more aggressive strategies with little to no advice. I look forward to the next review in 10 years and the recommendation to move back to more conservative mandate

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