Government has played down the risk of default KiwiSaver members incurring market-related losses as sacked providers transfer an estimated $3.6 billion to newly appointed schemes over an approximate two-month period from December 1.
In a cache of documents supplied under and Official Information Act (OIA) request to Investment News NZ, internal government advice says about 300,000 members and $3.57 billion would likely change hands during the default scheme reboot.
“Given the quantum of funds being transferred, this could potentially have some impacts on financial markets due to the liquidation and reinvesting of fund assets,” the Ministry of Business, Innovation and Employment (MBIE) advice says.
“However, we consider it is unlikely that these will result in any material impacts on financial markets or individual members’ KiwiSaver fund balances…”
Among several reasons (including one redacted) for its confidence, MBIE says statutory duties to “act in the best interest” of members should defray some of the risk involved in selling the $3.6 billion or so of assets on-market in a short time-frame while government is also preparing regulations to manage the transfer.
As well, MBIE says an expected fall in the actual number of default members forcibly removed from sacked providers as due-date looms and the fact some of the underlying investments are in large, liquid global assets should limit market-related losses (or gains) and costs during the transfer process.
“The current conservative default funds contain only a 20 per cent exposure to growth equity assets. As a result, the cashing up of these funds will likely have a minimal impact on financial markets given they will mostly be transactions in bonds,” the MBIE document says. “This means that any shift in market pricing caused by this reallocation is likely to have a reduced effect on day-to-day trading.”
Privately, many industry players are worried that the required sale-and-purchase of assets as the five removed default providers (ANZ, AMP, ASB, Fisher Funds and Mercer) exit from December 1 could see members hit with substantial transition costs and on-market losses. In addition to the asset transfer, the six newly appointed default providers (BNZ, Booster, Kiwi Wealth, Simplicity, SuperLife and Westpac) must upgrade underlying investments to a balanced fund arrangement from the previous conservative setting.
“While the impact of these risks, if materialised, would be borne by the default members, this could reflect poorly on Ministers and the government organisations, resulting in significant political damage and loss of confidence in KiwiSaver by the NZ public,” the MBIE advice says.
The government has set up a steering group comprising officials from MBIE, the Inland Revenue Department (IRD) and the Financial Markets Authority (FMA) to “mitigate the risks”.
Under the plan, the IRD takes charge of the relatively easier task of transferring member data while “while the responsibility of fund movement and member fees lies somewhere between the policy arm of MBIE and the regulatory oversight role of the FMA”, the advice says.
“The direct ownership of the fund transfer lies with the providers themselves, but without a framework or guidance to work to, the risk is heightened that many members could be adversely affected by the impact of the change imposed by the appointment process.”
Post the change on December 1, MBIE estimates member fee savings could amount to about $70 million over the seven-year term for the batch of six default providers – although the figure was revised down following an earlier calculation error.
“In summary the total savings over the seven year term from the proposed appointment of six providers reduces from $86M to $69M,” a MBIE note to government says.
Under the assessment terms, government sheeted 60 per cent of the appointment decision to fees with the remainder based on qualitative factors. (As an aside, MBIE previously favoured ranking providers on ‘value for money’ with no explicit weight to fees.)
As it turned out, the default appointment decision announced in May hinged almost entirely on fee quotes with an independent advisory panel finding almost nothing separating the 11 contenders (comprising the nine incumbents plus Simplicity and SuperLife).
From a relatively short list of candidates, government selected four members for the KiwiSaver default panel, namely:
- Mark Jephson (ex Perpetual Guardian chief);
- Debbie Birch, professional director with investment and iwi experience;
- Tom Hartmann, Sorted personal finance editor; and,
- MBIE director Karl Woodhead.
While the panel expressed some concern about the technical prowess of one potential default provider, ultimately it deemed all were fit-for-purpose based on qualitative factors alone.
However, the panel “had no input into the development of the model nor the weighting to be attached to fees proposals” developed by consulting firm PwC.
“The PwC model was approved by the Steering Group and the Panel did not have a role in determining the outcome of the fees results which were determined using the model,” MBIE says in a document.
PwC also carried out financial due diligence of the six successful providers, finding a problem with one redacted firm.
“For five of the six respondents, PwC did not identify any material concerns based on their analysis,” the MBIE document says.
Despite the PwC ‘material concerns’ about a financial aspect of the one provider, Finance Minister Grant Robertson confirmed all six MBIE-recommended providers as incoming default schemes in May.