Mercer has set the tone for the imminent KiwiSaver default scheme beauty parade, slimming down fees and embarking on an ambitious sustainable investment makeover.
Following the changes implemented last week, Mercer KiwiSaver default fund fees fell almost 20 per cent along while the manager also laid out plans to bolster the product’s responsible investment (RI) credentials.
Following the fee cut, the Mercer KiwiSaver conservative fund, which serves as the default option, carries an annual total charge of 0.47 per cent (plus a yearly fixed member administration impost of $27), down from the previous 0.58 per cent.
In a release, Mercer says new RI policies would see further exclusions from the default fund – such as weapons manufacturers, gambling, pornography and fossil fuel firms – as well as “added investments for creating a positive impact such as pollution control and energy efficiency”.
Sarah Whitelock, Mercer NZ consumer wealth leader, said in the release that a growing number of KiwiSaver members were looking for RI solutions.
“Mercer believes a sustainable investment approach is more likely to create and preserve long-term value, will increase member engagement, and is in KiwiSaver members’ best interest,” Whitelock said. “This fund will help achieve that, and is the beginning of many exciting changes we have coming up in KiwiSaver.”
She said for now the extended RI exclusions for now, apply only to the default fund, however, the positive tilts – achieved through exposure to thematic or impact managers – would be included in all the Mercer KiwiSaver options.
“By combining these priorities with the default KiwiSaver changes signalled this year, we will better serve members’ interests, and deliver better member outcomes,” Whitelock said.
The government is slated to deliver the final tender terms this month for approving the latest batch of default KiwiSaver scheme providers. In March this year the government confirmed it would use the seven-yearly default tender process to ram through further fee reductions and impose new fossil fuel stock exclusion rules.
Currently, the Ministry of Business, Innovation and Employment (MBIE) is considering feedback on two proposed definitions for the default fossil fuel exclusion rules.
All KiwiSaver providers are already required to screen out certain companies involved in the production of controversial weapons. But the latest proposals will set the fossil fuel and other exclusions as a ticket to entry for default providers.
However, the fossil fuel screens will be limited to sector-based exclusions of equities only, according to MBIE documents.
“That is important because there is some evidence that excluding too many sectors can negatively impact returns,” the MBIE document says. “This would not be aligned with the purpose of the KiwiSaver Act, which is focussed on the financial well-being of default members.”
Default funds will also switch from conservative to balanced investment settings under the government proposals. While the government has floated the prospect of a two-year transition from conservative to balanced asset allocation for default funds, MBIE favours an immediate switch.
In a Cabinet paper, MBIE says KiwiSaver balanced options have a “moderate (35–63%) proportion of assets invested in growth assets”.
“We would set a narrower allowable range for the default funds, within this broader range,” the government advice says.
Mercer is one of the nine current KiwiSaver default funds with the government reserving the right to either shrink or increase the pool of providers – although not dramatically – during the imminent selection process.
The MBIE discussion paper reveals the government is hoping the threat of losing default status will encourage providers to lower fees further in the new round of applications. Default status is projected to offer diminishing returns to prospective providers, however.
“Based on the current flow of new members, and assuming there are 9 providers (as is currently the case), new providers could expect to receive only approximately 6868 new members a year,” MBIE says. “Those members’ accounts will start with low balances that will gradually increase over time.”
As at the end of March last year, the AMP KiwiSaver scheme held the most default members (about 90,000), according to MBIE figures, representing about 40 per cent of its total membership. AMP houses almost a quarter of all default members, MBIE says.
While Mercer reported about 64,000 default members as at March 31 last year, the government-allocated cohort represented close to two-thirds of its wider KiwiSaver scheme population.
Along with the default conservative fund changes, Mercer cut fees on most of its other KiwiSaver options by about 5 basis points.