Government will forcibly transfer auto-enrolled KiwiSaver members from any existing provider cut from the next default fund appointment round, a release confirmed today.
The transfer threat was among a raft of proposed radical changes to the KiwiSaver rules that will also see all default funds exclude fossil fuel investments and switch to a balanced asset allocation mandate from June 2021. As per usual, the government will also use the default fund appointment process to further squeeze providers on fees.
Industry broadly supported the proposal to move from conservative to balanced risk settings for default funds mooted in the Ministry of Business, Innovation and Employment (MBIE) discussion paper published last August.
However, the options to bulk transfer members if current default schemes miss out in the mandated recurring seven-year reappointment process and impose responsible investment restrictions will prove more contentious.
According to the list of new default rules tabled by on Sunday, the government will transfer “non-active default members of any provider that is not reappointed to one of the appointed default providers (so that these members retain the benefits of being in a default fund)”.
In the release, Commerce Minister Kris Faafoi, said the new fossil fuel exclusion rule for default funds “reflects the Government’s commitment to addressing the impacts of climate change and transitioning to a low-emissions economy”
“It also makes sense for the funds themselves given that there is a risk of investing in stranded assets as the world moves to reduce emissions,” Faafoi said.
John Berry, Pathfinder chief executive, agreed the fossil fuel proposal would help “protect investors in default funds from the poor returns from oil and coal companies”.
Pathfinder manages the CareSaver KiwiSaver scheme, which screens out fossil fuel investments.
In a statement, Berry said: “We welcome and are pleasantly surprised by this bold move by the government to join us in this position of leadership in New Zealand. We believe it is a smart and forward-looking approach for both investors and the planet.”
Undoubtedly, though, the fossil fuel proposal and forced member transfer option could turn off prospective default fund providers while sending chills through the current batch of nine schemes on the auto-enrolment carousel.
Finance Minister Grant Robertson said the government would also look for further costs reductions from default providers.
“… the fees each provider charges will be factored into the providers we select during the procurement process,” Robertson said in the statement.
And Faafoi said default providers would face tougher obligations to help members with personal finance issues “like understanding what fund is best for KiwiSaver members and how much they should be contributing”.
While light on detail, the proposed government default system reforms released on Sunday include:
- changing the investment mandate from ‘conservative’ to a ‘balanced’ fund;
- ensuring KiwiSaver fees are simple and transparent, and using the procurement process to put pressure on fees;
- obligations on default providers to engage with their members to help them make informed decisions about their retirement savings;
- excluding investments in fossil fuels and illegal weapons. While default fund providers have in recent years divested any investments in companies involved in illegal weapons like cluster munitions and anti-personnel landmines, the changes now enshrine that requirement in default fund settings;
- requiring default providers to maintain a responsible investment policy that’s published on their website; and,
- transferring non-active default members of any provider that is not reappointed to one of the appointed default providers (so that these members retain the benefits of being in a default fund).
According to the latest Inland Revenue Department (IRD) statistics, since inception of the quasi-compulsory savings scheme in 2007 about 1.3 million of the current 3 million plus KiwiSaver members were automatically enrolled. However, less than half (590,000) remain in default-allocated funds, the IRD figures show.
The IRD statistics vary from the government release, which counts about 690,000 KiwiSaver members in default funds, of which “approximately 400,000 of those have not made an active choice to stay there”.
Of the 33 registered KiwiSaver schemes, nine are default providers, namely: AMP, ANZ ASB, BNZ, Booster, Fisher Funds, Kiwi Wealth, Mercer and Westpac.
Government plans to begin the default fund selection process later this year ahead of formal appointments beginning in June 2021. Some of the default fund reforms may require regulatory or legislative changes.