Financial Services Council chief executive Peter Neilson said the decision to stick with default schemes investing conservatively would mean New Zealanders had to save more, for longer, and pay more tax.

It had been suggested that default schemes should alter savers’ risk tolerance depending on their age but that was ruled out when the results of the Government's review of the system were revealed yesterday.

Neilson said it was a missed opportunity and the OECD had provided information on how guarantees could be provided if the Government was wary of risk.

“Many people who have enrolled into KiwiSaver have defaulted into conservative funds without making an active choice to be there…If someone on the average wage contributing 6% pa stays in a conservative fund for the next 40 years they’ll end up with a nest egg at least $150,000 smaller than if they invested in a balanced portfolio, $250,000 less than being in a growth fund. Investors also need to know that conservative funds suffer the highest effective tax rate which increases the savings required to get to a comfortable retirement.”

Other changes as a result of the default scheme review, which started last year, include the requirement that default providers offer investment education and impartial financial advice.

Finance Minister Bill English said:  “It is vital we continue to build on KiwiSaver’s contribution to developing a savings culture and lifting New Zealanders’ confidence in our financial sector.”

The Government will run another tender to appoint up to 10 default providers for the next seven-year term, beginning in the middle of next year.

The tender selection criteria would be the same as it was in 2006, except that providers will now also have to demonstrate how they will offer investor education to encourage default members to actively choose which fund they should be in.

ANZ Wealth managing director John Body said the review had delivered certainty but ANZ was disappointed that the life cycle approach had not been adopted. But he said other changes might address some of the problems. “The requirement in future for providers to raise the level of education and financial advice is likely to see younger members choosing to move away from conservative funds earlier in their savings lifetime anyway.”

ANZ would apply for another seven years as a default provider.

“It's best to have a small number of tightly regulated default providers with strong standards that set the bar for the industry. There needs to be a sufficient number for competition and innovation while at the same time allowing scale to generate lower costs for members. We'll see what happens through the tender process in terms of the final number of defaults.”

Milton Jennings, chief executive of Fidelity Life, which recently sold its KiwiSaver business to Grosvenor, said it would work on a tender.  But he said the benefits of default status were less than they were seven years ago. “With two million members now, you don’t get a lot of new people starting jobs, it’s certainly dropped off.”

But he said the people who joined via default were often good clients to have, because they were young people with significant savings opportunities ahead of them.