Prospective default providers would need at least $100 million of KiwiSaver-only money to be in the running, the Ministry of Business, Innovation and Employment (MBIE) clarified last week.
In a response to a question lobbed in the request for proposal (RFP) prelude, MBIE says: “We can confirm the precondition that the proposed KiwiSaver Scheme must have total aggregate funds under management of at least $100m to mean exclusively KiwiSaver funds under management by the provider.”
The technical clarification effectively rules out just four retail KiwiSaver providers (restricted schemes can’t apply) from the default appointment process, all relatively new entrants: CareSaver; Kōura Wealth; Nikko Asset Management; and the just-launched InvestNow. Both the Pathfinder-run CareSaver and Nikko would’ve been potential default candidates if MBIE adopted an entity-wide funds under management threshold.
As well as the nine existing default schemes – all likely to fight for reappointment, even if for defence purposes only – a few others will probably throw their hats into the ring including the two most passive-leaning schemes, the NZX-owned SuperLife and Simplicity.
The youthful Pie Funds-backed Juno also, just, meets the funds under management (FUM) criteria after cracking through the $100 million mark as at March 31 this year. While about five other schemes make the MBIE FUM grade, with Milford and Generate the largest among them, they tend to be at the actively managed, higher-fee end of the market – a mix of qualities that won’t get a look-in under the default tender RFP standards.
But two-thirds of the possibly 15 providers vying for default fund status could face disappointment, and/or commercial disaster, if the government of the day sticks to the bare minimum of schemes outlined in the RFP.
“The Ministers have agreed that their preference is for appointment of a minimum of five providers. However, the Ministers may appoint more than five providers if, but only if, they consider that doing so does not materially decrease overall value for money,” the RFP says. “If appointing less than five providers can significantly enhance value for money, this may also be done.”
Whether the implied threat of cutting at least four of the existing default schemes is genuine or just reflects MBIE’s application of the latest Nobel Prize-winning auction theory will be revealed early next year: either way bidders will be highly motivated to price their offers at basement level with fees representing 60 per cent of the final decision.
Regardless, the RFP includes a detailed description of how current default schemes that miss the cut must transfer members to the winners ahead of the December 1, 2021 start date for the new regime.
“Unsuccessful incumbent Default Providers will need to cooperate with and advise Inland Revenue who their Default Members are so that Inland Revenue can sequentially reallocate them to the new Default Providers on 30 November 2021,” the RFP says. “Inland Revenue will develop an approach for how and when Default Member details are supplied by unsuccessful incumbent Default Providers and this may require testing to ensure the information can be shared accurately.”
Post the legal transfer date “successful Default Providers will need to work closely and professionally with the unsuccessful incumbent Default Providers to transfer Default Member accumulations and details in an accurate and timely way that does not adversely affect the interests of members being transferred”.
The government also retains the right to delay any default member transfer process if there is “significant market volatility” around the switching hour.
While the risk of losing many thousands of default members is weighing on incumbents, the RFP also adds some hefty new “service obligations” to winning providers.
In addition to establishing new balanced investment funds (following the decision to change from the previous conservative asset allocation) to house default members, successful bidders will take on some onerous ongoing ‘engagement’ responsibilities.
For example, default providers will to make, and prove, efforts to contact members at ‘life event’ trigger points such as making a first-home withdrawal, a “pre-retirement check-up” (10 years beforehand), retirement and a post-65 support program.
Candidate default providers may have to tap into a bit of auction theory themselves, as developed by Robert Wilson, who was award the Nobel in economics – along with Paul Milgrom – for his efforts in the field early in October.
According to a BBC report, Wilson “developed a theory as to why rational bidders tend to place maximum bids that are below what they estimate the actual value of the object to be: they are worried about the so-called ‘winner’s curse’ – overpaying to win the auction”.
Last week MBIE updated its RFP forms following an observation from industry that one of the technical sections was “not numbered and excludes questions or requests for specific information related to the requirement”.
The error, as acknowledged by MBIE, was in the “Record Keeping and Reporting sub-category”.
As at March 31 this year, the Financial Markets Authority reported about 380,000 ‘non active choice’ members remained in default funds, which collectively managed about $4 billion.
RFP responses are due in by December 18.