David Chaplin 's Opinion

A personal finance columnist for the NZ Herald

Inside Money: KiwiSaver default de-risk challenge from Peters

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Winston Peters' 'Kiwi Fund' plan means political risk is back on the agenda for the default KiwiSaver schemes. Photo / Hawkes Bay Today
Winston Peters' 'Kiwi Fund' plan means political risk is back on the agenda for the default KiwiSaver schemes. Photo / Hawkes Bay Today

The Key government, while keen to get 'mums and dads' investing in power stations and whatnot, has given a clear signal it doesn't want to be in the business of investment advice.

This is quite understandable political de-risking, although the document supporting the government's decision to leave the KiwiSaver default investment settings essentially unchanged, words the argument differently.

"The Government should take a risk-averse approach to investing on behalf of those who do not make an active choice for themselves, given that the individual circumstances and risk preferences of this group are likely to differ," the Cabinet paper outlining the KiwiSaver default decision says.

Instead, the government has lobbed that one back to the KiwiSaver suppliers, adding a stipulation that default providers offer "investor education and impartial financial advice, including actively contacting default enrolled members on investment strategy decision choices".

In principle that's not a bad idea but in practice it probably just means more unread pamphlets filed in recycling (or, if you assume default members are averse to active decisions, dumped straight into the general refuse bin). And where, for that matter, are the current batch of default providers going to send members for "impartial financial advice" - off to rival banks, perhaps?

The more exciting news, from an industry perspective, is the potential expansion of the default provider roster from five to a "maximum number" of 10, according to Cabinet minutes of a September 26, 2013 meeting. 'Maximum' is used loosely here, too, as the ministers in charge can reserve "the right to appoint a higher number after obtaining advice following evaluation of the tenders".

Reading in between the lines, however, it looks like the criteria will enable Westpac, KiwiBank and maybe a few other wildcards (SBS, Grosvenor, Superlife?) to bid for a place at the default table, giving the government greater "leverage in fee negotiations".

Given the selection process more or less follows the original 2007 guidelines, the five existing default providers should make it back for seven more years without too much trouble - with the possible exception of the Tower scheme, which, following its purchase by Fisher Funds is the most-changed in a corporate sense - although they will all face pressure to drop their fees.

The Cabinet paper argues that with average funds under management of about $590 million per default scheme (as per a "recent" Morningstar Research report) "increasing the number of appointed default providers by a small number will not necessarily cause a loss in scale economies".

At the same time, the document points out that default member sign-ups have dwindled to about 440 per month per scheme and may continue to fall.

On the commercial upside, however, the Key government might come good on its promise to issue a mass 'auto-enrol' edict, providing a one-off boon to the default schemes; some may even be uncharacteristically hoping for a Labour victory next year and the gift of compulsion.

But, thanks to Winston Peters' brilliantly-timed 'Kiwi Fund' proposal political risk is back on the agenda for default KiwiSaver schemes.

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.

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