By Craig Simpson
The KiwiSaver default provider beauty parade will begin in earnest shortly. The prize is a not a diamond tiara but a multi-million dollar payday.
The Ministry of Business Innovation and Employment (MBIE) estimates the projected fee income generated from default members over the next 10 years could be $400– $500 million.
The process is supposedly a free for all with the incumbents: AMP, AXA (now owned by AMP) ASB, Tower (now owned by Fisher Funds), Mercer & ANZ's OnePath, not guaranteed a spot on the podium. I would be extremely surprised if AMP, ASB, Mercer and OnePath were not reappointed.
Ministerial documents indicate that up to 10 institutions could potentially be appointed as default providers. But you really have to question firstly whether we need default providers, and secondly why so many.
Role of the default fund
KiwiSaver includes an auto-enrolment feature and there is a need to have a short-term solution to park funds until they are reallocated. Default funds are also acting as a longer term investment solution for those who either make a conscious decision not to move their funds, don't have the necessary information or skills to make an active decision, or for those who simply can't be bothered.
MBIE in its November 2012 consultation paper re-iterates that the objective of KiwiSaver is to encourage a long-term savings habit and financial asset accumulation by individuals who are not in a position to enjoy standards of living in retirement similar to those in pre-retirement.
MBIE also goes on to highlight that international experience indicates there is a persistent group of savers remaining in the default product, even though it may not be appropriate to their own circumstances and risk preferences.
To my mind there is a conflict between the underlying principles of KiwiSaver, as set out in the MBIE paper, and the current actions to retain default providers and adopt a conservative long term strategy.
Keeping in mind the underlying principles behind KiwiSaver default funds, is there any need to have so many potential institutions as default fund providers?
Sweden and the UK provide a single default product and the Savings Working Group supports this approach. However, the government does not because of what it perceives as incumbency and concentration risks.
My opinion on this matter is that one cash fund could act as a default proposition. A majority of the contributions coming into KiwiSaver pass through IRD via employer deductions. Therefore it would seem plausible that IRD could provide a quasi default fund for investors.
Let the default position be cash
I would argue that adopting a cash fund solution is more aligned to the underlying principles that default fund(s) are a short term parking space and not intended to be a long-term investment strategy.
Cash funds (or cash deposits) are traditionally low cost solutions used to park money that is needed in the near term and where the investor requires both liquidity and capital assurity. Having a conservative fund as your default strategy does not ensure a low cost solution with a high degree capital assurity as up to 25% of the funds are invested into higher risk assets such as shares.
Further, investors knowing they are getting minimal returns on their capital are more likely to be proactive and seek advice on what is the best solution for them given their personal situations.
If the default position was cash and it was run by IRD then we would see a smaller number of people in default funds and more money spread across the various fund managers rather then just a select few.
The current selection criteria is potentially biased to banks and large institutions
A summary of the high level criteria is below:
- a proven track record in investment capability and delivering funds management performance the ability to deliver the government's specification for the default investment option and meet the standards required;
- an ability to provide a full suite of KiwiSaver funds in addition to the default fund
- the provider is a reputable organisation with the financial capacity and infrastructure to maintain and enhance the proposition, while pursuing ethical standards that will not bring the KiwiSaver provider into disrepute.
- the systems and processes to undertake a large volume of transactions and in a timely manner;
- administration systems that are both scalable and flexible enough to adapt to frequent changes in legislation and provider features.
Track record and stability:
- a commitment from the organisation to the NZ to accept the mandate and to carry it out to the best of its ability.
Investor education and advice
- the ability and commitment to provide investor education and impartial financial advice including to proactively contact default enrolled members to ensure they are invested appropriately.
Based on what we know today there is scope for the selection criteria to be biased against smaller boutique operators. I say this because some smaller and boutique KiwiSaver providers do not offer a full suite of products. Some in fact do not have a conservative fund and many smaller operations do not have the infrastructure, scalability of systems or manpower to be able to commit to ongoing education of the general public. .
Does this mean they are inferior managers? Not at all. Many of the boutique offerings are outperforming some of the bigger managers and banks. Surely they are worthy of consideration and should not be discounted before the pageant has even begun.
In my mind, the institutions likely to meet all the criteria are the banks (e.g. ANZ, ASB, BNZ & Westpac), consulting firms (e.g. Aon, Mercer, Superlife etc) and large insurance companies (e.g. AMP) who manage corporate superannuation schemes already.
It will be interesting to see whether BNZ is afforded a default position despite only operating a KiwiSaver scheme for less than one year and whether the panel of judges look past this and view the performance of the underlying manager who has been successfully operating via Aon's KiwiSaver scheme.
Fisher Funds could also be a bit of dark horse in the equation as they already own Tower who were previously a default provider.
Impartial advice - what's that?
I applaud the provisions that the default providers must commit to increasing financial literacy, however I have an issue with is the providing of impartial financial advice.
Impartial by definition means; not partial or biased; unprejudiced.
If a customer rocks up to their local bank (which is a default provider) are they going to receive unbiased or unprejudiced advice? I would like to think they would but having been around the financial services industry way too long I know the answer is a resounding NO they won't.
To potential investors I say, good luck finding someone who can give you impartial advice and who does not have conflicts of interest.