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Advisers pan KiwiSaver settings

Significant changes are needed to the KiwiSaver scheme to stop it funnelling money to the banks, two advisers say.

Tuesday, December 3rd 2019, 6:21AM 1 Comment

Rachelle Bland and John Cliffe made a submission to the Government’s review of the default KiwiSaver scheme.

They said default KiwiSaver providers had generally failed to meet their contractual obligations to move clients out of “temporary” default funds.

“This is because many are deeply conflicted, particularly the Australian-owned banks, which are some of the biggest default funds. Our analysis of their default fund portfolios in July 2018 showed oligopoly behaviour with significant placement of funds in bank term deposits. There has been no set performance standard.”

Bland and Cliffe said the review needed to set specific performance standards for providers shifting members out of default funds.

“To this must be added automatic consequences for non-performance, such as stopping the flow of new default members to their fund. This could be done on a quarterly basis to rapidly correct underperforming default funds. If the member exit performance target is set significantly higher than their inflows, inevitably this would lead to a decline in default fund membership, exactly the outcome the Government desires. The exit rates could be set higher for the existing largest default fund providers, who have not performed.”

They said there was no evidence that having nine default providers had not resulted in lack of economies of scale.

“We believe that the initial six providers received significant incumbency benefits and they have abused that position by not engaging adequately with members to move them into more appropriate funds. To remedy the mis-allocation of default funds, a reallocation of default members should be considered after a specific time. To illustrate, after two years’ membership in a default fund, a member could be automatically reallocated to another default fund provider that is meeting the performance guidelines in terms of member engagement and transfers out.”

Bland and Cliffe said having more default providers outside the banks would mean more money going into New Zealand investments, such as bonds, and the NZX.

They also rejected the idea of default funds taking on a lifestages approach because it was hard to gauge whether such an approach was working.

“Lifestages is a marketing ploy designed to suggest that the manager is adding value by making these changes when in fact all they are doing is adding cost and implying that they know better than the KiwiSaver member what is best for them at whatever age they are (which as a model is regularly at odds with the truth).”

Tags: default funds KiwiSaver

« Fund managers: One for the teamRoss investors seek $75 million from ANZ »

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Comments from our readers

On 3 December 2019 at 11:42 am nzeverydayinvestor said:
Disruption is coming to KiwiSaver. Whilst it will affect the incumbents, especially those who are lazy, indifferent, or arrogant - there are huge opportunities to make a difference to Kiwi investors by providing genuine value to them - I don't think we've cracked that nut yet but this is a great viewpoint.

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AIA 4.55 ▼2.69 ▼2.69 ▼2.99
AIA Special - 2.69 2.69 2.99
ANZ 4.44 3.15 3.25 3.39
ANZ Special - 2.55 2.69 2.79
ASB Bank 4.45 ▼2.69 ▼2.69 ▼2.99
ASB Bank Special - 2.69 2.69 2.99
Bluestone ▼3.49 ▼3.49 ▼3.49 ▼3.49
BNZ - Classic - ▼2.55 2.69 2.99
BNZ - Mortgage One 5.15 - - -
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BNZ - TotalMoney 4.55 - - -
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China Construction Bank Special - 2.65 2.65 2.80
Credit Union Auckland 5.45 - - -
Credit Union Baywide 5.65 4.75 4.75 -
Credit Union South 5.65 4.75 4.75 -
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Heartland Bank - Online - - - -
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HSBC Premier 4.49 2.60 2.65 2.80
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HSBC Premier LVR > 80% - - - -
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Last updated: 16 July 2020 2:33pm

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