KiwiSaver default member? Someone’s deciding your future for you
Is your KiwiSaver fund one of the nine Default funds? If you are a Default member, people who you don’t even know exist, is deciding your financial future now. Also, you are in the company of 700,000 KiwiSaver members who belong to a Default fund. Allegedly, only 430,000 have not made an active choice to remain in one. The design of a default system was to create a temporary ‘parking space’. The aim was to allow time for members to make up their mind.
Currently there are nine KiwiSaver providers who are a ‘default’ provider. Among a range of funds they manage, they have on offer a ‘default’ fund. Each provider has a term of 7 years to enjoy that status. Every seven years a competitive tender helps choose a new group.
There were five default providers chosen when KiwiSaver launched in 2007. The current group of nine providers was chosen after the review undertaken in 2014.
Encouraging lazy investors
There are around 25 KiwiSaver providers in total. One of the unintended consequences of having a system of designating a handful of providers as ‘default’ is that it has resulted in a cohort of lazy investors.
It has also created a lop-sided provider market with the default providers collectively managing a significant majority of the $60 billion in KiwiSaver savings. This raises concentration risks for the KiwiSaver initiative as a whole.
Most people find decision making hard. More so when the decision is about investments and finances. As a result, a fall back option is appealing considering the IRD randomly allocates an undecided member to one of the default funds. As such, it is not surprising that the default provider system has partly been responsible for a culture of laziness.
Digging the hole deeper
In the current round of submissions, one of the suggestions raised is the idea of choosing a new cohort of default providers and then to transfer existing default members across to the funds managed by the new cohort of providers.
This suggestion, as well-intentioned as it is, raises a number of issues.
A mass transfer will come at considerable administrative costs. You will likely bear this cost. Fair to say, it will be a one off cost, but a drag on your returns nonetheless.
Additionally, a mass transfer away from an existing pool of providers to a new cohort of providers on any basis makes it grossly unfair to the current providers. These providers have gone to considerable lengths over the past years to sign up members and invested in encouraging existing default members to make active choices.
A new default provider will have an unfair advantage in this instance given they effectively enjoy a free lunch at the expense of current providers.
Closing the gap
A more elegant solution would be to do away with the system of ‘favouring’ a handful of providers with a default status.
The first determination should be how fit for purpose a provider is to manage our life savings. If a provider is not fit for purpose then they should not be allowed to operate. On the other hand, if they are fit for purpose, then place obligations on them to:
- create a fund in their suite of products to be a ‘default’ fund. Those members who don’t make an active choice get allocated to this fund.
- engage/ educate the member in moving them into an appropriate fund, within a mandated time-frame.
This approach eliminates most of the challenges with the current default system.
One observation is pretty obvious from the above. Your future is truly being determined by folks you don’t even know exists, if you are a default KiwiSaver member.
Get involved if that thought concerns you. Spare a thought for how your money is invested. We have made it super easy for you to make an informed decision– just click here!