The Government is working through appointing KiwiSaver default providers for the next term, which starts next year, through a tender process.

At the moment, there are just under 690,000 people in default funds and almost 400,000 of those have not made an active choice to be there. There are nine providers of default schemes – AMP has the bulk of the market, at 22.38%, followed by ANZ.

The Ministry of Business, Innovation and Employment and Treasury said in the regulatory impact statement that providers of default funds had many benefits – there was a steady stream of customers and they had a reputational benefit.

“Some providers have told us that the reputational benefits of being a default provider alone would incentivise them to tender competitively.”

But they said a potential outcome of the current procurement process was that one or more of the default providers might not be reappointed as a default, and that would create questions as to what should happen to their members who had not made an active choice to be there.

The KiwiSaver Act allows regulations to be made to provide for default members of a scheme to be reallocated and transferred at the expiry of the providers' instrument of appointment.

If members were to remain with the scheme they defaulted into they would lose the protections of the default scheme, such as limits on fees, the paper said. There would also be insufficient incentives for new providers to tender or tender competitively because the rate of new default sign-ups had slowed significantly.

There would also be insufficient incentive for schemes to engage with default, non-active members.

“If they do not face any risk that default members would be transferred away at the end of their appointment they may have reduced incentives to incur the expense of attempting to engage with members.”

Treasury preferred the idea of transferring members from default providers with more members, as well as those not reappointed, to providers with fewer.

But MBIE backed the option proposed by Government of reassigning the non-active members of a provider that was not reappointed. This would reduce the disruption in the market and the risk of people losing trust in the scheme, the paper said.

The paper noted that a large transfer of members could have an effect on the financial markets.

“When a member is transferred their investments are liquidated and the accumulated funds and data are transferred to the new scheme. During this time, the value of the KiwiSaver fund is taken off the market, transferred to the new provider and then reinvested into the market.

“Subsequently, providers with incoming members will be obligated to invest these funds. There is a risk that if these investments all occur at the same time the increased demand for investment vehicles could serve to drive up market prices.”

That could be mitigated by staggering transfers, the paper said.