The government has sought industry feedback on two KiwiSaver fossil fuel exclusion options ahead of opening up the default scheme to tenders in September.
Under the new proposals sent to providers early in July, KiwiSaver default schemes would have to exclude fossil fuel investments (equities only) based on either ownership alone or in concert with a further “primary business activity” filter.
The first option would require default providers to screen out stocks that have “proved or probable” fossil fuel reserves and earn at least 15 per cent of their revenues on the back of them.
Alternatively, default funds would exclude shares based on the above criteria plus those caught under primary business activity definitions covering:
- exploration, drilling, and production of oil and gas;
- supply of equipment and services to oil fields and offshore platforms;
- integrated oil and gas companies; or,
- exploration for or mining of coal.
Despite the aim to green-up KiwiSaver default portfolios, both options exclude fixed income securities while “commodities, derivatives and other [non equities] investments are unaffected”, the consultation letter says.
“Ministers are seeking to significantly reduce investment that supports fossil fuel production while wanting to avoid limiting investment options for default members more than necessary and to avoid higher costs to default members,” the letter says.
The mini industry consultation closed last week.
Commerce Minister Kris Faafoi unveiled the broad fossil fuel exclusion proposal this March along with a range of measures designed to radically overhaul the default KiwiSaver regime during its statutory seven-year re-tendering process.
“… the Treasury and the Ministry of Business Innovation and Employment [MBIE] will soon release a request for proposals (RFP) document that will outline the requirements for being a default fund provider and the process for evaluating proposals,” the letter says. “We are anticipating that this will be released in September 2021.”
The September 2021 date is likely a typo as the RFP process is due to kick off in this half of 2020 following a five-month delay due to the COVID-19 lockdown. Newly appointed default scheme providers will begin their seven-year terms at the end of next year.
Aside from the surprise fossil fuel exclusion clause, the government will move the new default investment strategy from the current conservative setting to balanced, force down fees and require schemes to help develop NZ capital markets.
More contentiously, government confirmed in March that any existing providers that fail to make the cut for 2021 would see their default-acquired members shunted off to other approved schemes.
Cabinet papers confirm that the government has ruled out a dramatic expansion or reduction of the current nine default scheme numbers.
“We would emphasise before the procurement process that we are seeking the best procurement outcome and that this might mean that some default providers are not reappointed and the number of providers might reduce,” the Cabinet paper says.
Treasury and MBIE are somewhat at odds on how to redistribute members from schemes that lose default status, the paper reveals. MBIE favours reallocating members from ex-default KiwiSaver providers to approved schemes either sequentially or weighted to shunt a larger proportion to smaller schemes. However, Treasury argues for a complete redistribution that will see all approved schemes emerge with roughly equal numbers of default members. About 120,000 members would be shifted under the Treasury-preferred option, assuming the current nine providers make it through the RFP unscathed.
As at the end of March last year, the AMP KiwiSaver scheme included almost 90,000 default members (or about 22 per cent of the total) followed by Mercer (roughly 64,000, or 16 per cent), ASB (70,000, 17.5 per cent) and ANZ (close to 54,000 and 13.5 per cent).
The Cabinet paper also reveals prospective default providers will have to submit separate service standard and fee proposals to be assessed via a two-stage process. Schemes would have to meet minimum standards to qualify for phase two.
“The evaluation panel would then assess proposals against certain qualitative criteria (for example, each provider’s member engagement offering),” the paper says. “Fees would then be overlaid separately and a value-for-money assessment made…
“Our view is that this approach would increase the extent to which the evaluation panel can take into account fees and value-for-money in a meaningful way. It would also strengthen the incentive for KiwiSaver providers to make strong offers in the procurement process. We also intend to make it clear that we are open to seeing a reduction in the number of providers which should also sharpen the providers’ offers.”
Government will also ask providers to scale fees in favour of low-balance members. Default KiwiSaver funds will further have to report all scheme costs under a bundled percentage fee plus a monthly or annual member fee.
“Providers could choose to charge one or the other, or both,” the paper says. If adopted, underlying manager costs, other expenses and variable fees would be reported under the single percentage measure.
The paper shows government is considering a staggered transition from conservative to balanced investment strategies for default schemes. Potentially, there could be a two-year hiatus before default member funds flow into the balanced option.
Finance Minister, Grant Robertson, and Commerce Minister, Kris Faafoi, “intend to make further decisions consistent with the… recommendations, without seeking further feedback from Cabinet”, the government paper says.