In its report to the Government earlier this year, the Savings Working Group left no doubt about its unease over aspects of KiwiSaver. It said much more could be done to ensure people found it straightforward to opt into low-cost, diversely invested funds. In particular, it focused on the considerable scope for reducing fees, and hence increasing returns, for those who became members of one of KiwiSaver's six default schemes after failing to specify what scheme they wanted to belong to.
The working group was so attracted by the "untapped potential for members to be better off" that it wanted work to begin at once and change to take place in 2014.
It foresaw the present default arrangement being replaced by a single scheme managed in a manner similar to the Super Fund. The Government has not acted. Commendably, however, the Green Party has brought the issue into the public arena as a centrepiece of its savings policy. As a first step, it proposes the establishment of a seventh default provider managed by the Guardians of the New Zealand Superannuation Fund to slash fees and costs.
In response, the Prime Minister has summoned up a new-found urgency, suggesting the Government was keen to look at how it could combat high fees. But he cautioned that outsourcing to the Super Fund "might lead to an implied Government guarantee that we are actually guaranteeing your funds". That, however, is a minor educational matter compared to the scope of the problem identified by the annual report of the Financial Markets Authority, which was released last month. It found that 42 per cent, or $43 million, was charged in fees on fund earnings of $104 million for the six default providers.
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Whatever the extent of the providers' level of management, this is an astonishing figure. Yet it was effectively prefigured by the Savings Working Group which suggested that if the six default schemes were aggregated into one, members' returns would be 6 per cent higher in 20 years. With almost a third of KiwiSaver members in default schemes, this would mean a $2.5 billion increase in total KiwiSaver funds.
If further motivation for action were required, it has been provided by the Australian Government, albeit that it has responded somewhat differently to the problem of high fees. From 2013, all funds in its compulsory superannuation scheme will have to include a MySuper option. This will be a low-cost product with a one-size-fits-all investment portfolio for the vast majority of Australians who do not want to take an active interest. It will also be the default scheme.
This captures the economies of scale, but it takes the simplification of investment too far. A bland, sluggishly performing one-size portfolio ignores the fact that, typically, people will want different investment risk profiles at different stages of their lives.
For this reason, the Savings Working Group suggested its proposed single default scheme would offer a limited and simple range of investment mixes that recognised people's circumstances.
More sophisticated options would remain the domain of non-default schemes. This balanced approach should be the hallmark of any change.
At the moment, the Greens are proposing only a seventh default provider as a spur to competition. A single provider could be the outcome of a KiwiSaver review in three years, they say. Their approach is as sensible as it is timely.
The impetus towards KiwiSaver compulsion, whether of the hard or soft variety, makes it important that the scheme serves members' interest as well as possible. That cannot be the case when tens of thousands of dollars of retirement income are being lost in fees.