Regulators have confirmed default KiwiSaver members due to be forcibly transferred to new providers after November 30 will likely wear the transition expenses.
In a recent email sent to all 11 providers involved in the mass default reshuffle, the Ministry of Business, Innovation and Employment (MBIE) notes the government along with the Financial Markets Authority (FMA) “expect all providers to act in the best interests of members throughout the transition process, in line with their existing obligations”.
“The FMA has also communicated its expectations that the costs of moving members should be borne by the moving members, unless providers themselves bear the cost,” the MBIE email says.
Outgoing default providers – AMP, ANZ, ASB, Fisher Funds and Mercer – would almost certainly not want to foot the transfer costs. The prospect of incoming schemes – BNZ, Booster, BT/Westpac, Kiwi Wealth, Simplicity and SuperLife – taking a hit to their balance sheets to fund the transition is also low.
Providers would not be permitted to load the switching costs to existing members of either outgoing or incoming schemes.
Explicit upfront transfer expenses could be in the order of 0.4 to 0.6 per cent as default members would be forced to ‘cross the spreads’ by selling down assets in one scheme and buying into another.
But as a Mercer NZ study published earlier this year highlights, a large-scale fund transition also carries other expensive risk, including:
- market impact – where trading underlying securities moves prices to the detriment of investors;
- opportunity costs – missing out on returns due to a staggered on-market transfer process; and,
- out-of-market risks – skewing asset allocation away from targets during the transition that could create “unpredictable losses or gains”;
- administrative expenses; and,
- operational risks – or the danger of human or system errors in organisations managing the transition in-house.
According to the FMA 2021 KiwiSaver annual report, about 70 per cent (or 263,000) of current default members are expected to make the trip to new providers after November 30 this year, implying the shift will total almost $3 billion (based on the $4 billion in default funds as at the end of March).
Under the transition plan laid out in new regulations posted at the end of September, the Inland Revenue Department will start allocating members to new default schemes on a “sequential basis” from December 1.
However, MBIE told the 11 providers early in October the government has allowed about two-and-a-half months to complete the on-market shift of member assets.
“To mitigate adverse cost impacts on members from market fluctuations arising from the transition itself or other market movement, outgoing providers will then have up to 75 days to transfer the member’s funds and information to the member’s new provider. In deciding how to space their transfers, the outgoing providers have existing obligations to act in the best interests of their members,” the MBIE email says.
“The FMA may extend the 75 day period for funds transfer by up to 35 days if that would be in the interests of members, having regard to market conditions. The FMA can also extend the transition timeline if that is necessary or desirable to facilitate or enable the transfer.”
Regulations also empower the IRD to delay the start of the default shake-up as a “COVID-related precaution”.
“At this stage we do not anticipate any delays in starting the transition process,” MBIE says.
Furthermore, the recently published regulations set out protocols for handling affected default member requests such as changing providers during the transition period (they can’t) or permitted withdrawals (to be carried out within five days by outgoing provider).
Commerce Minister David Clark said in a release in May that on average an 18-year entering a default fund today would save about $3,900 in fees by age 65 post the changes, equating to about $2,400 (after inflation) or $50 a year.