KiwiSaver providers: Balanced is better – hold the RI
The Government is running a review of the default KiwiSaver system ahead of appointing default providers.
As part of that, it consulted on a range of topics, including fees, the settings of default funds, and KiwiSaver’s role in promoting responsible investment and supporting capital markets.
DEFAULT SETTINGS
Many of the providers said default funds should be balanced, not conservative.
ASB said it had supported the idea of the funds as a “parking space” in the past and would prefer to see better outcomes due to improved customer engagement rather than a change of settings.
But it said there were problems engaging “a substantial group” of default members. Industry best efforts produced activation rates of only about 15%.
“Accepting this and that the Government may have to assist funding any shortfall for these members at retirement, we believe it is justified to move away from the view that a default fund is a short-term parking space. Therefore we support a less conservative investment mandate for the investment product.”
Kiwi Wealth said a balanced approach would give about the same outcome as a lifestages option and would avoid older people being derisked unnecessarily early.
Westpac was another vote for balanced: “While life-stages would also be a good default option if an entirely new regime was created, we believe it is very complex to transition from the current arrangements without impacting significantly on the trust and confidence of members.”
Pathfinder questioned whether the settings should be changed at all, arguing that it could remove the incentive for members to engage and move funds.
“Rather than a change of investment mandate, thought should be given to reminding investors that default funds are intended as temporary. The term ’default’ is unhelpful, and implies that it has been selected or recommended by the Crown. It gives no sense of urgency to consider a switch. The fact it is a ‘parking space' should be made clearer through the name – ‘default’ should be changed to something clearly signalling the ‘interim’ and ‘temporary’ nature of a default selection.”
AMP and ANZ were in favour of a lifestages option, though AMP noted that thought would need to be given to how that transition happened for existing members.
The providers acknowledged that first-home buyers would need a more conservative approach than others in their age range but said that they tended to be more engaged with their savings, anyway.
Milford said people could be asked in the sign-up stage whether they planned to use their money to buy a house.
FEES
Most providers said members were getting value for their KiwiSaver fees, particularly in default funds. They said more economies of scale should be expected.
“We agree that members should expect fee reductions as providers achieve scale benefits. However, it is important to note the variable nature of many costs, for instance overseas manager costs. Exposure to offshore markets is a key aspect of a diversified investment strategy,” ANZ said.
ASB had a similar sentiment: “We agree that members should expect fee reductions as providers achieve scale benefits. However, it is important to note the variable nature of many costs, for instance overseas manager costs. Exposure to offshore markets is a key aspect of a diversified investment strategy.”
They rejected the idea of the Government setting fees – except for Simplicity, which said there should be a standardised default fee.
But MyFiduciary said KiwiSaver was often not providing good value for money.
“That is, in our view fee levels are generally too high for the types of strategies that most schemes employ. This is not to say that lower fees necessarily offer better value. Fee levels could arguably be higher, but still offer good value for members, if strategies employed included a higher allocation to private markets and ‘alternatives’ in general.”
RESPONSIBLE INVESTING
There was division over KiwiSaver’s responsible investment obligations. Submitters had been asked whether default funds should have a responsibility mandate.
ASB said it would not be appropriate for the Government to direct how KiwiSaver funds should be invested.
“Currently, investing with a preference for investments that make a positive impact on society or the environment means a fund will be less diversified in the investments it can pursue. This means it may forego some potentially profitable opportunities on ethical grounds.”
Milford said a basic level of responsible investment was appropriate.
Pathfinder argued that setting a single set of values was controversial and that opting only for exclusions could increase volatility.
MyFiduciary said KiwiSaver providers had a fiduciary duty to consider responsible investment and report on their RI activities.
"We assess that most providers still have a lot of ground to make up to integrate environmental and social governance (ESG) into their investment process."