As previewed a couple of weeks ago, the government's default KiwiSaver makeover plans feature a rethink of current investment strategies for disengaged members.
The Ministry of Business, Innovation & Employment (MBIE) discussion document published this Tuesday, notes default options the world over tend to exert an inordinate gravitational pull.
"Based on the experience with KiwiSaver default product enrolments to date, the experience of other jurisdictions, and research by behavioural economists, we expect there to be a large and persistent group of savers remaining in the default product, even though it may not be appropriate to their own circumstances and risk preferences," the report says. "This forms the basis of a hypothesis that shifting the KiwiSaver default product towards a longer term, more growth-oriented investment objective will deliver better outcomes for default members."
While the report states early on that the government has "no preferred position", there is a clear implication that the current conservative investment strategies of default KiwiSaver funds don't serve the best interests of most members.
Suggested options include 'life-cycle' funds, which change individual members investment mix on an age-based formula, or 'target date' schemes that lump an annual cohort (say, those due to turn 65 in 2040, in a single investment pool that adjusts over time).
Either way, mandating default KiwiSaver members to take on more risk carries some obvious political risks too.
"In many respects the Government's role regarding the default product is as a de facto investment adviser," the report says.
Furthermore, by selecting private default providers the government also hands those (mostly) lucky institutions a free kick.
"We think valuable brand equity accrues to a product and a provider through the awarding of default status. It gives, in effect, an implicit government 'stamp of approval' which equates to a value-add for that provider," the MBIE document says.
There's a real economic value for default schemes, too, with the report estimating the current six providers could collect between $400-500 million in fees from default members over the next decade not including the 'brand equity' that might flow on to their other products.
The report also notes that the "notion of providing 'choice' by having a number of default providers may be largely redundant, outside a spreading of concentration risk across several providers rather than one".
Despite dismissing the idea of a single government-run scheme, the report contemplates a number of scenarios that might dilute this default effect including appointing more providers (up to 12 might qualify under existing rules).
Another option may be to let everyone in on the game by allowing all providers to offer a default-compliant fund similar to the MySuper rules currently being implemented in Australia.
Whatever happens, it is hard to see the default game to continue without some significant changes to the rules. For instance, the MBIE report proposes a few ways to rein in the economic rent-seeking behaviour that default providers are prone to, including:
Imposing a fixed fee meaning default managers won't get the natural uplift in income as funds under management increase;
A tiered fee where a percentage-based fee must reduce as funds under management rise; and, centralising the administration function for all default schemes to create economies of scale, leaving managers free to charge only for investment duties.
Incumbents, of course, will be lobbying to protect the status quo but there's enough in this report to suggest they shouldn't succeed.By David Chaplin