A saver's capital is unlikely to be eroded, but it means lower returns over the long run.
From November those in default schemes will have their money invested using a balanced setting.
In simple terms this means more money will be in equities. It's a riskier investment, but over the long term means a better return.
Martin Stearne, chair of Capital Markets 2029 - a taskforce set up by the NZX and the Financial Markets Authority (FMA) to review capital markets - said the recent reforms reflect some of its recommendations.
Today we've got 300,000 default KiwiSaver members, some of whom have been in those schemes for a long time. In fact, some of them have been in them since the inception of KiwiSaver.
Stearne says the change from default schemes having a conservative setting to a balanced one is a great move, particularly for people who are new to KiwiSaver. It's an on-ramp to investing in the capital markets.
"It will make a significant difference to the average saver over the course of their lifetime."
FMA director of investment management Paul Gregory says: "The longer that you have to invest, the more risk you can afford to take, and probably should take.
Over the long term, the return is likely to be a lot better. The problem with having a conservative setting as the default was that a lot of harm can be caused over time by people not having access to the returns they need for a retirement income."
Gregory says when KiwiSaver was first established, the default funds were intended to be a short-term parking space for people's money and with the intention that they would get around to choosing a longer-term plan.
"Risk averseness goes with that. You don't want to take chances over a short term. But things didn't work out that way. Today we've got 300,000 default KiwiSaver members, some of whom have been in those schemes for a long time. In fact, some of them have been in them since the inception of KiwiSaver."
Just as a move to balanced setting makes a difference to investors over the long term, a move to lower fees on default schemes has a long-term payoff.
The government estimates an 18-year-old earning $50,000 a year and contributing 3 per cent of their income would pay $3900 less in fees.
But given that money will stay in their account compounding for more than 40 years, it will make a far bigger difference to their eventual savings.
Gregory says lower fees reduce the drag on the return of an investment, which means a greater benefit from the return.
He says the FMA believes the fees charged by a fund and the level of services they buy need to be viewed together.
The Government now requires KiwiSaver managers to provide evidence they are in frequent communication with members. This can be with either a conversation or the "equivalent digital advice".
Specifically, they must talk when a member first joins KiwiSaver, after a member withdraws money for a first home, at 10 years and one year out from reaching 65 and then once they turn 65.
These rules also set out key milestones, such as the annual member statement, when the managers must contact members.
The change in default providers and the switch from conservative to balanced schemes is a major undertaking that will involve many millions of dollars.
Yet it is unlikely to have a material effect on the local exchange. Hugh Stevens is a member of the NZX senior management team and CEO of the NZX-owned Smart-shares, one of the new default scheme providers.
"We're moving from conservative schemes to balanced," says Stevens. "A conservative scheme might have a 10 or so per cent allocation to equities. With balanced schemes, there would be around a 60 per cent allocation to equities. We're going to see more investment and shares."
FMA director of investment management Paul Gregory.
But scheme managers invest in equity markets around the world. Typically, only 16 per cent of the money would go into New Zealand equities.
While no one knows exactly how much will move when the default funds switch on the first of December, it could be in the region of $3.8 billion.
So, 16 per cent of that, or around $500 million, will go into the New Zealand market.
Stevens says if it happened that way, it would be a big day for the NZX, but not the biggest, The record for a single day on the NZX is $1.2b.
The providers have until the end of January to make their transitions, which is 39 trading days. Which means most of those days would be unremarkable trading days for the market.
Stevens says, "the question then is, what happens to the rest of the market? With strong signals coming from the government and industry, it's likely over time the large number of KiwiSaver members who are not on default schemes may look at their investments and choose to make a similar move to a higher risk, higher growth scheme."
