Time to fix the savings musical chairs
KiwiSaver default system - time to fix the savings musical chairs
Official figures quote that 715,000 KiwiSavers are members of default funds. Of this pool, about 430,000 remain in default funds, having not made an active choice. On average, default funds have been earning 6% p.a. over the last 10 years. Over that same period, middle-of-the-road balanced funds have earned on average 8.7% year on year. Making some broad assumptions* that is a difference of about $8,000 per individual member. Meaning, members of KiwiSaver default funds have collectively missed out about $3.5 billion dollars in accumulated savings over 10 years.
Submissions to the 7-year review of KiwiSaver default providers closed this week. The discussion document covered a number of options to rectify the unintended consequences that have risen over time.
Binu Paul, co-founder of price comparison site, PocketWise (www.pocketwise.co.nz) says “The current system of having a small group of providers selected from the universe of all providers creates numerous distortions, none of which favor the KiwiSaver member. One, it has created a concentration of funds with the small group. Two, it has created a cohort of at least 430,000 lazy investors who have taken the easy route of not having to make a choice. Notwithstanding the fact that the IRD randomly allocates each member to one of the 9 providers. With the current review of the default KiwiSaver funds it is timely to reconsider why have a default KiwiSaver mechanism at all.”
One of the options raised in the discussion document relates to managing the existing pool of default members should the mix of providers change, as a result of the review. Options such as doing bulk transfers between old and new providers are fraught with danger, according to Paul.
“One it has the potential to create significant costs within the sector which could likely pass on to members. But, also think of the fairness of this to existing default providers who have invested over the years in signing up members, and the ‘free lunch’ that passes on to any new default providers.
Paul says, “Perhaps a more effective solution would be to require all providers to satisfy all requirements and if they are fit for purpose allow them to operate a KiwiSaver scheme. The same strict criteria should be applied across the board, not just a subset of providers. The license to operate should also come with an obligation to have at least one fund in their Scheme as a ‘default’ fund as well as the requirement to transition default members into more appropriate funds in their Scheme within a timeframe. Educating and engaging with the members should be a pre-requisite for all providers”.
- Annual salary of $60,000 (wage inflation of 1%)
- Employer contribution of 3% matching own contribution of 3%
- Contributions starting 10 years ago