In last month’s column, I outlined the changes the Government is making to the KiwiSaver scheme from December.
The changes only apply to those KiwiSaver members who have not specifically chosen their manager and, as a result, have been allocated to a default fund.
Of the almost $80 billion of funds invested in KiwiSaver, just over $10 billion is held in default funds.
The number of individuals who will be affected by this change is estimated to be 380,000, so it is not an insignificant matter.
The key changes taking effect from December 1 are:
- Of the nine current default providers, only four have been reappointed. Those losing their default status are AMP, ANZ, ASB, Fisher Funds and Mercer.
- The reappointed default providers are BNZ, Booster, BT Funds (Westpac) and KiwiWealth.
- Two new default providers have been appointed: Simplicity and Smartshares (NZX).
- This means the total number of default providers has reduced to six, those being BNZ, Booster, BT Funds (Westpac), KiwiWealth, Simplicity and Smartshares (NZX).
- The asset allocation of the default funds is changing. From December the maximum allowable exposure to shares and property will more than double from 25% to 63%. This can be characterised as a change from a conservative mix of investments to a more balanced approach. This change will automatically occur without any reference to the client’s risk profile or age.
- There is a new requirement for default providers to have a responsible investing policy and specifically exclude fossil fuel production and illegal weapons.
- The management costs offered by default providers will now fall within the 0.20% to 0.40% range.
In last month’s column I hinted at some of the investment matters those affected by these changes need to consider. This comment was accompanied by my usual catchcry that you need to seek qualified advice.
Some interesting themes are evident in these changes.
When looking at the list of those not reappointed and the two new appointees, a definite ‘‘buy New Zealand-made’’ theme emerges. The funds management industry in New Zealand has come a long way in the 14 years since KiwiSaver was first launched.
It points to a maturing of the industry that two-thirds of the new default provider panel are independent New Zealand-owned businesses.
It is not just for parochial reasons that I am happy about this. I believe there is a fundamental difference in managing capital for New Zealanders, by New Zealanders, and not merely operating as part of an offshoot of an overseas corporation.
The second theme seems to be an implied preference for passive investing over active management. The new appointees are advocates of a index approach to investment.
This contrasts with the approach taken by several of the outgoing managers whose management styles are more active. The debate between passive vs active investing continues, but perhaps it is the drive for lower fees that has tipped the balance towards a more indexed approach for default providers.
I still believe it is possible to offer the best of both worlds, whether that be within the same fund or a parallel offering. One of the criticisms of the existing default providers was they had not done enough to educate their investors about the benefits of selecting an asset allocation more suited to their needs.
This is the challenge of a dedicated, low-fee business model; the ability to deliver added value by providing investor education materials and tools can be limited by economic realities at play.
It will be interesting to see how the new default providers meet this challenge.
Although you might not be affected directly by these changes, they are also a timely reminder to review your own KiwiSaver account. Over the past few months you will have received your KiwiSaver annual statement.
It is worth taking a moment to consider your contribution level and your asset allocation to make sure it is giving you the best possible chance to build the retirement you desire.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily those of his employer. His disclosure statements are available on request and free of charge.
