David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

David Chaplin: KiwiSaver defaults face death sentence

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Is the death sentence looming for KiwiSaver default providers? Photo / Thinkstock
Is the death sentence looming for KiwiSaver default providers? Photo / Thinkstock

As we speak executives from the six default KiwiSaver providers will be anxiously thumbing through this action-packed final report from the Savings Working Group (SWG) hoping Bill English doesn't read the section calling for their death (of course, I mean the schemes not the executives).

The SWG report makes a strong argument for abolishing the default KiwiSaver system, handing full membership admin duties to the IRD and the asset management responsibilities to another government agency (a side project, perhaps, for the New Zealand Superannuation Fund).

This recommendation is sure to met stiff resistance from the six entities - AXA, AMP, Tower, Mercer, OnePath (formerly ING) and ASB - because the default system has delivered them a steady stream of clients and revenue.

According to my survey of KiwiSaver providers, the government handed the six default providers directly over 400,000 members in the year to March 31, 2010 (collecting fees of around $18 million) as well as giving them, inadvertently, an official seal of approval that no doubt attracted others to select these schemes for themselves.

It's not that these six schemes are particularly badly run or expensive but they are required by law to offer almost identical products, which the SWG says leads to senseless duplication that it estimates at least double the cost of a single, government-run default scheme.

Over the course of 20 years the SWG report says that could mean an extra $2.5 billion credited to KiwiSaver member accounts rather than in providers' pockets.

As a sop to the default providers - who, to be fair, have spent millions setting up the schemes - the SWG suggests they may be allowed to manage a portion of the money (albeit only in low-cost index funds) for a specified period.

It's understood the default providers, too, could continue to market their more expensive products and services to their (former) scheme members.

But the SWG also wants to radically alter the current default asset allocation rules, which weight heavily to low-risk fixed interest investments, to a more age-appropriate asset mix based on modern portfolio thinking.

The report envisages five funds within the single default scheme that members would be allocated to by age bracket if they did not select their own. All default funds would invest only in passive index products.

Finally, the SWG floats the idea of a further low-risk default fund that invests only in short-term government bonds in an attempt to attract the extremely risk-averse to KiwiSaver.

If English does get around to reading this stuff the default providers have good cause to worry.

David Chaplin

A personal finance columnist for the NZ Herald

David is a freelance journalist who has covered the financial services business on both sides of the Tasman for over 15 years. David has edited magazines and websites for the financial advice, investment and superannuation industries. Today, he contributes to various publications in Australia as well as his bi-weekly blog for the NZ Herald under the 'Inside Money' banner.

Read more by David Chaplin

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