Dr Eric Crampton, chief economist with The New Zealand Initiative, says the KiwiSaver default fund fossil fuel investment ban will have unintended negative consequences. Photo / file
Dr Eric Crampton, chief economist with The New Zealand Initiative, says the KiwiSaver default fund fossil fuel investment ban will have unintended negative consequences. Photo / file
The Green Party chalked up a win over coalition rival NZ First as the government announced this morning that KiwiSaver default funds will stop investment in fossil fuels.
But right-wing economist Eric Crampton says the move will lead to unintended negative consequences.
Finance Minister Grant Robertson and Commerce and Consumer Affairs Minister Kris Faafoi said their announcement reflects the Government's commitment to addressing climate change.
The pair also said that contributors who fail to decide where to put their money will no longer be put into the lowest-returning, least risky 'conservative' KiwiSaver funds but 'balanced' fund setting, with a higher proportion of riskier assets such as shares.
Green Party co-leader James Shaw says his party has won a significant change - but also one that needs to be followed up with further measures. Photo / Mark Mitchell
"The government has missed a real chance to improve Kiwisaver settings," says Crampton, who serves as chief economist for free-market ginger group The NZ Initiaitve.
"Shifting the default from conservative to balanced is an improvement, but defaults could more reasonably vary with the worker's age, with default growth funds for younger workers."
"Forcing default funds to divest of fossil fuels is a rather bad idea," Crampton says.
"Funds should seek the highest overall return within the risk category."
If some investors have particular ethical preferences, funds are already there to cater to their needs, he says.
"Default allocations should be set so that they minimise the number of people who have need to switch funds.
"But the lack of popularity of ethical funds makes it unlikely that they are the preferred choice for many.
"Therefore this move will increase management costs in default funds by forcing an unnecessary change, and risks turning Kiwisaver portfolios into political footballs with changes in government."
Best approach for planet
This morning's announcement got a warmer reception from a self-described ethical investment fund manager.
"We welcome and are pleasantly surprised by this bold move by the government to join us in this position of leadership in New Zealand," said John Berry, chief executive of fund manager Pathfinder and the CareSaver provider.
"We believe it is a smart and forward-looking approach for both investors and the planet."
Green Party co-leader and Climate Change Minister James Shaw said his party won a significant change in the way KiwiSaver funds can invest from June 2021 by securing the exclusion of fossil fuels.
"We need more bold actions like the one we announced today, and we need others that are holding large purse strings to follow KiwiSaver and end their investments in fossil fuels," he said.
Officials: higher fees, but higher confidence
In last year's discussion document on the proposals, officials warned ministers that excluding certain types of investments would result in higher fees, but could result in higher confidence and trust in the KiwiSaver scheme, which has vastly outperformed the expectations of its architect, Michael Cullen.
In a default fund ... by default
The fossil fuel exclusion follows a similar exclusion on investment in companies involved in illegal weapons like cluster munitions and anti-personnel landmines, which has been in place for several years.
It applies to the 690,000 people who were automatically enrolled in a default KiwiSaver fund when they started a new job. It does not apply to KiwiSaver providers outside the Government's default providers.
Of the country's 3 million KiwiSaver members, just under a quarter are in default funds, with fewer than half of those actively choosing to hold their investments in a low-returning default fund. Around 400,000 are in default funds, literally, by default.
More engagement
Faafoi said the new contracts will also require providers to do more to engage with their members.
"This will help with things like understanding what fund is best for KiwiSaver members and how much they should be contributing so they are on track for the type of retirement they want," he said.
Other obligations will include ensuring KiwiSaver fees are simple and transparent, requiring default providers to maintain a responsible investment policy that's published on their website, and transferring all non-active default members of any provider that isn't reappointed to one of the appointed default funds.
In the previous re-tendering, Westpac, Bank of New Zealand, KiwiBank and Booster - formerly Grosvenor Financial Services - joined AMP, ANZ Bank New Zealand, ASB Bank, Mercer and Fisher Funds as default providers.
The Government is targeting the fossil fuel indusrtry to address climate change. Photo / File
The CareSaver provider is positioning itself as the best ethical option, saying it's the country's only fossil-fuel free provider based on analysis by Mindful Money, a charity that promotes ethical investment.
"We welcome and are pleasantly surprised by this bold move by the government to join us in this position of leadership in New Zealand," said John Berry, chief executive of fund manager Pathfinder and the CareSaver provider.
"We believe it is a smart and forward-looking approach for both investors and the planet."
ASB's head of private banking, wealth and insurance Adam Boyd also supported the government's move.
"We fully support Impact investing and that's why last year we launched The Positive Impact Fund which aims to provide moderate to high returns from a diversified portfolio of investments, with a preference for investments in organisations whose activities make a positive impact on society or the environment," he said.
In last year's discussion document on the proposals, officials warned ministers that excluding certain types of investments would result in higher fees, but could result in higher confidence and trust in the KiwiSaver scheme, which has vastly outperformed the expectations of its architect, Michael Cullen.
New Zealand First had been pushing for the creation of a government-owned and operated KiwiSaver provider.
Deputy leader Fletcher Tabuteau withdrew a private members bill in late 2018 for a working group to consider such a scheme, saying he'd help the ministers do groundwork for the default review and the Retirement Commissioner's review of retirement policies which was canvassing the issues he wanted addressed.
