There are losers not just winners from the Government’s just-announced changes to the KiwiSaver default scheme, writes Nikki Mandow
Tens of thousands of people with collectively more than $1 billion in KiwiSaver funds could lose out from the Government’s just-announced changes to the KiwiSaver default scheme – if the share market crashes or corrects over the next year or so and they want their money out.
From December 1, the money from the 381,000 KiwiSaver members who haven’t actively chosen what KiwiSaver fund they want to be in, and who have therefore been randomly placed in one of the default funds, will automatically move from a “conservative fund” (most money in low-risk places like bank deposits and bonds) to a balanced fund (more money in more volatile investments like shares and property).
Which for most people is a good thing. A Treasury/MBIE review of KiwiSaver default providers found default savers were collectively losing millions of dollars over the long term having their money invested in low-risk, low return assets.
But the opposite is true for people who might want to take out their money over the short term – say, the next one to three years. For example, someone who might be planning to use their KiwiSaver funds for a deposit on their first house, or someone who might need it for their retirement or to get them through unexpected sickness or disability.
For these people, being in a very low-risk fund is best, because a share market crash or correction could leave them with thousands of dollars less in their fund than before – with no chance to wait for the market to pick up again.
“I feel the government is taking a huge risk by automatically moving members from their default fund to a balanced fund with another provider without their authorisation,” says Clive Fernandes, director of KiwiSaver advisers National Capital.
“In the current market, the probability of a correction is very high. Not the time you want people with no education about investing being moved to a fund with 50-60 percent growth assets.”
Fernandes isn’t the only person predicting rough times are likely to be on the way – though no one can say when.
“Trouble is ahead,” said Forbes Media editor in chief Steve Forbes. “The stock market bubble will burst.”
“History suggests a valuation-induced crash may be on the horizon,” says US-based financial advice company Motley Fool.
The greater good
The Government is in a difficult position. Call it a greater good conundrum.
The decision to automatically switch everyone from conservative to balanced funds will benefit the majority of default KiwiSavers, whose sloth, lack of knowledge or lack of interest has seen them in a conservative fund when a balanced or even a growth fund would have made them better off when they retire.
Treasury and MBIE officials crunched the numbers for the default providers consultation paper.
“Assuming an average starting salary of $42,500 a year and a 3 percent contribution rate, an individual joining KiwiSaver at age 18 today who remains in a conservative fund is estimated to have a KiwiSaver balance that is approximately $135,000 lower at retirement than if a growth fund was chosen, and approximately $56,000 lower at retirement than if a balanced fund was chosen.
“For a person who retires at 65 and lives to age 90, these returns equate to $358 a week in retirement for a growth fund and $242 a week in retirement for a balanced fund, as compared with only $166 a week in retirement for a conservative fund.”
‘Forcing’ these people into a balanced fund is a good thing.
The trouble is there’s that minority Fernandes talks about – perhaps 15 percent of those disengaged KiwiSavers who by luck (or rather by regulation), not by judgment, have been in exactly the right fund, and now won’t be.
And because of the size of KiwiSaver – three million New Zealanders are members, with $62 billion invested – the numbers could be significant.
What can be done?
Mary Holm, financial columnist and author of “A richer you: how to make the most of your money” reckons there’s going to be a big push for default providers to try to get those 381,000 disengaged KiwiSavers to make an active choice.
As part of the changes to the default scheme announced last week, the Government has cut the number of default providers from nine to six, taken five of the old default providers off the list, including the two biggest ones, ANZ and ASB, and added two low-fees companies, Simplicity and SuperLife (now part of the NZX’s SmartShares), to the group.
Holm says the chosen six will be wanting to prove their worth.
“I bet everyone in a default scheme will get a huge amount of communication, because the Government is playing up the importance of offering good service.”
It won’t be easy. The 381,000 are by definition, hard to reach.
“They are the ones that haven’t responded to past communication,” Holm says.
And the Government’s main focus in choosing the new six default providers was low fees, which likely means there won’t be too much money available for one-on-one personal service.
Sam Stubbs is co-founder and chief executive of Simplicity, one of the new default schemes. He says all the company’s communication is electronic – sales teams won’t be ringing individual KiwiSavers or sending them letters.
Still, there will be plenty of emails and other material.
“When they come over, there will be a huge moral obligation to make them pay attention to their KiwiSaver,” Stubbs says.
Tom Hartmann. personal finance lead at the government-funded Commission for Financial Capability, says many of the inactive KiwiSaver members are young – or youngish – busy with new jobs, flats, friends and families.
“Very often they are just getting started; there are lots of other things going on, so their KiwiSaver is relegated to the back burner.”
But that demographic might react well to more imaginative marketing campaigns pushing them to take KiwiSaver fund choice advice from a site like that provided by CFFC tool Sorted, Stubbs says.
“We might incentivise people – like having a free T-shirt Friday if you go in and do your fund finder.”
Melissa Vasta is general manager of retail and product at Kiwi Wealth, part of the Kiwibank group. She led the company’s (successful) bid to stay on the list of default KiwiSaver providers and has plenty of experience of the difficulties trying to contact members to try to get them to make an active decision about which fund they should be in.
She says the team traditionally uses a mixture of emails, phone calls and letters, with a quarterly blitz to try to contact as many people as possible. A recent move to use AI chat (rather than humans) to guide people through the whole process has worked well with some customers.
“We didn’t expect that.”
“It’s rare to be given customers who don’t have any interest in your product or know what you are doing.”
Even with its best efforts, Vasta says Kiwi Wealth is left with 20,000 out of its 220,000 existing customers who sit in the default conservative fund simply because they’ve never made a choice.
And when the Government divvies up the default investors from the five providers that missed out in the tender – ANZ, ASB, AMP, Fisher Funds and Mercer – Kiwi Wealth will gain a few thousand more.
Which is kind-of a nightmare – and also an opportunity, Vasta says.
“It’s very rare in any field to be given customers who really don’t have any interest in having your product or knowing what you are doing.
“But it’s a good chance to streamline our processes and help people make good financial choices.”
The new Kiwi Wealth default fund will be a new product for the company. Until now, it has concentrated on active fund management – where experts make an active choice about what products to invest in.
But because of the Government’s focus on low fees for the default funds, Kiwi Wealth, like the other default providers, will be opting for a more ‘passive’ (and therefore cheaper) management style for the fund.
Passive investment at its most basic is when the investor or the fund manager doesn’t study the market and make decisions on what investment might be best. Instead they choose to follow an index (the NZX50, for example or the S&P 500) and simply hold stocks in proportion to the stocks on that index.
‘Passive’ doesn’t mean lower quality decision-making or poor performance. Many smart investors, including top-10 richest-person-in-the-world Warren Buffett, swear by long-term passive investment. (US podcast Planet Money tells the story of Buffett’s US$1 million passive investment bet in the episode Brilliant vs Boring – it’s one of my favourites.)
But there’s also an argument that in uncertain times, or overheated times when some stocks might be very overvalued, having your investments managed by a human can be an advantage. Particularly if you need your money out quickly – as might be the case with some of the default KiwiSaver investors who will end up being moved from a conservative (and therefore lower-risk) into a balanced (and therefore more high-risk) fund.
Hartmann says even the ‘conservative’ fund status quo might not have been ideal for all people wanting their money out quickly. They might have been better off in a super-low-risk ‘defensive’ fund.
But he says a scheme designed for the majority, not the minority, is a step forward.
“All those young people in a conservative fund were missing out on potential returns over such a long period,” he says.
“There was a big opportunity cost of doing nothing.”
