Each of the six incoming KiwiSaver default providers named last week stand to inherit over 50,000 members and $560 million plus apiece based on current incumbent metrics.
The five sacked providers – ANZ, AMP, ASB, Fisher and Mercer – collectively control about 85 per cent of the existing default market, according to Ministry of Business, Innovation and Employment (MBIE) figures.
AMP alone represents 22 per cent of the entire default market, the MBIE data shows, suggesting the scheme could lose roughly 80,000 members and close to $900 million come the penciled-in November 30 transfer date.
But the 381,000 default member tally cited in the government press release last week likely overstates the size of the prize: the number is snatched from the Financial Markets Authority (FMA) annual KiwiSaver report to the end of March last year.
As the FMA reported at the time, all default schemes had successfully converted at least some auto-allocated members into ‘active choice’ status during the year.
“… a total of 43,123 default KiwiSaver members had made an active decision about their fund in 2020, compared to 52,289 default members who made an active choice last year,” the FMA report says.
Assuming a similar conversion rate during the 12 months to March 31 this year, the rump default member numbers would have gone backwards: Inland Revenue Department (IRD) figures show about 25,000 new default members were roped into KiwiSaver over the period.
And the losing five current defaults will work hard over the next six months to activate their auto-allocated members.
Bruce McLachlan, Fisher Funds chief, said the scheme would be communicating with all affected members to explain the change.
“We have a good record of working with our default members,” McLachlan said. “And we’ve already had a lot of members contact us last week after the government announcement.”
The FMA report shows Fisher converted over 20 per cent of default members into active choice during the 2019 reporting period and 7 per cent the following year.
In the 2020 period default member conversion rates ranged from 6 per cent for AMP to 16 per cent at Booster, which has the most consistent record in the task.
Despite the shrinking value of default status, McLachlan said Fisher is nonetheless “partially disappointed” in losing the gig.
“The real volumes in default member growth were in the early years of KiwiSaver – particularly over 2008 to 2021,” he said. “Of course, we are disappointed but for what the government was seeking to do we saw no value for the clients or our organisation [at the lower fee levels].”
Fisher started the process at the upper end of the default fee schedule with an annual management charge of 0.52 per cent (plus $1.95 per month member fee). Understandably, McLachlan would not reveal the final Fisher offer but the price would likely have been in 0.4 plus range, where ANZ, ASB, and Mercer probably landed too. AMP, which began at an already-low 0.39 per cent plus a $1.95 monthly member fee, must’ve missed out for reasons other than price.
Winning bids in the latest default round ranged from the super-low 0.2 per cent for the NZX-owed Smartshares to 0.4 per cent at Westpac (a surprise retainer given the bank’s Australian owner has put its NZ arm on sale notice): none of the six successful KiwiSaver schemes include fixed dollar member fees.
Hugh Stevens, Smartshares head, said the business priced the 0.2 per cent default fee – a third cheaper than the Simplicity offer – to reflect an efficient index strategy exercised through the group’s existing underlying products.
“This will have a very low-cost implementation with a simpler asset allocation model,” Stevens said. “For example, we’ve thought about how many assets classes we need to have.”
He said the super-cheap fee could also attract non-default KiwiSaver members looking for a cost-effective passively managed balanced fund option.
Sam Stubbs, Simplicity chief, said the default fund fee structure would probably apply across all the scheme’s products once the new regime comes into force. All Simplicity KiwiSaver and diversified retail funds currently carry a 0.31 per cent annual management fee plus a $30 yearly member charge.
“Philosophically, we want all our funds to have the same price,” Stubbs said.
He said Simplicity would look to match the Smartshares price, too, as the $3 billion manager built more scale.
Effectively, the government has secured a range of providers offering various shades of index. Smartshares and Simplicity are already passive providers across most of their respective strategies while the BNZ, Booster and Kiwi Wealth default funds will be almost entirely index-based.
Westpac is yet to declare its hand but the active multi-manager (implemented through subsidiary, BT Funds NZ) did tack on factor-based manager, Northern Trust, late last year.
In a statement, Nigel Jackson, Westpac NZ head of investments, said: “As part of our application to the Government to be reappointed as a default KiwiSaver provider, we outlined a reduction in fees on our new default fund. We will provide information to customers about the new fee structure in the near future. We’re also in the process of reviewing fees on our other funds.”
Whether the low bar set by the new default funds reverberates through the entire KiwiSaver sector remains to be seen.
However, particularly the two newbie default providers,– Smartshares and Simplicity – will face some unique challenges with the influx of high-maintenance members on December 1.
Smartshares would be the better-prepared of the two with its long-standing SuperLife employer super scheme servicing resources to tap into, for example.
Stubbs said Simplicity would have to gear up to meet the new default obligations.
“We’ll probably have to hire between two to six people to service the default members coming across,” Stubbs said.
He said Simplicity would not require new capital to fulfil its obligations. Currently, the Simplicity corporate entity was in slight negative net tangible asset status but would soon turn positive, Stubbs said.
Experienced default scheme providers, though, suggest the newcomers should not underestimate the work required.
Fisher’s McLachlan, for example, said default members tend to be the hardest to contact and the most time-consuming to service with a large proportion of the cohort prone to lodging first-home or financial hardship withdrawals.
“The reality is default members take up a lot of resources,” he said.
Allan Yeo, Booster managing director, agreed. Yeo said Booster probably ran the default book at a loss after accounting for service costs.
“We have about 20 plus people on our KiwiSaver client service team and we’ll probably have to hire at least three-times that amount for the first six months after the new default transfers come across.”
In the wake of the shock KiwiSaver cull last week, all of the losing schemes issued statements expressing regret, not despair.
Adam Boyd, ASB head of wealth, for instance, said in a release: “At this point in the evolution of KiwiSaver, we’re very focused on ensuring we can invest to support our existing customers who make an active choice to invest with ASB Kiwisaver.”
Blair Vernon, head of AMP wealth NZ – worst-hit in an absolute sense by the government decision – said the loss represents just 7 per cent of the group’s assets (although, it’s closer to 15 per cent of the KiwiSaver scheme alone) and 3.5 per cent of revenue.
AMP, of course, is close to shifting almost all of its KiwiSaver assets (and other products such as the NZ Retirement Trust employer super platform) to passive strategies managed by BlackRock. The BlackRock transition is slated to take place early in June.
Both ANZ and Mercer talked up the value of active management in their respective announcements.
Martin Lewington, Mercer NZ chief, said. “We are very proud of our KiwiSaver proposition. Our focus is primarily on active management, diversification and responsible investing which makes our product a little different from a typical default fund. We’re confident that New Zealanders will continue to see value in our KiwiSaver.”
Commerce Minister David Clark said in a release last Friday that on average an 18-year entering a default fund today would save about $3,900 by age 65, which equates to about $80 a year.
While the government touted its fee-slashing prowess last week, it did not provide detail on how the transition of possibly 300,000 plus members and more than $3 billion would happen overnight on November 30. Until that date all nine incumbents will continue to accept default-allocated members.
The one-day change-over also involves a shift of all default funds to a balanced asset allocation and a sell-down of certain fossil fuel stocks.
MBIE briefings await.