KiwiSavers missing out under default fund model
AUSTRALIANOWNED banks are the winners as more than 200,000 KiwiSavers who have invested in default funds miss out on an estimated $1 billion over the past six years.
A group of independent financial advisers, who have no involvement with KiwiSaver funds, yesterday called for immediate and substantial changes in the way default KiwiSaver funds operate.
Spokesman John Cliffe, from Cliffe Consulting, said New Zealanders in the default funds had overpaid an estimated
$70 million in tax, which was included in the $1 billion.
Meanwhile, $1.5 billion of their funds was invested in securities issued by Australianowned banks and insurance companies.
The group wants changes. ‘‘The problems with default KiwiSaver funds are systemic and longstanding. They are well understood, yet little of real substance has been done to resolve them by those involved, including banks and insurance companies, the Financial Markets Authority, the Reserve Bank or successive governments.’’
Using publicly available data, the group had, for the first time, quantified how default KiwiSavers were missing out, Mr Cliffe said.
Default KiwiSaver funds totalled about $4.6 billion, and about $1.5 billion of it was invested in cash or shortterm bonds.
The three main issues that had contributed to the default members missing out were: the inappropriate conservative default fundtype setting; the
failure of default fund managers to switch default members out to better funds at an appropriate rate; and overtaxation of a large number of New Zealanders in the default funds.
Mr Cliffe said there were three basic types of investment funds: conservative, balanced and growth.
KiwiSaver assets were designed for retirement funding, specifically retirement income maximisation, a longterm purpose where a balanced (or growth) investment strategy
was much more appropriate.
‘‘A conservative strategy is generally incompatible with the overall purpose of KiwiSaver, so it effectively penalises longterm investors. Yet the default funds are all conservative.’’
The problem had been evident almost from the start of KiwiSaver, he said.
However, when new contracts for default suppliers were let in 2014, the conservative default fund model was retained.
The decision to keep default funds conservative rather than balanced had resulted in default members missing out on about $830 million over the six years ended March 31, 2018, or about $2.7 million a week.
Default funds were designed as a ‘‘temporary holding place’’ for new KiwiSavers from which they could be switched to a more appropriate fund, Mr Cliffe said. But for many savers, the switch had never taken place. Default fund managers had performed poorly in that regard.
During the past six years, about 460,000 KiwiSavers had switched out of default funds. Numbers in default schemes had only marginally reduced, as new members offset those switching out.
In 2012, there were 447,274 members in default schemes. At March 31, 2017, at least 444,486 KiwiSavers were in default funds. And the value of assets in default funds grew from $2.92 billion in 2012 to
$4.6 billion in 2017.
Many of the lowestincomeearning KiwiSaver members were paying tax at the highest possible rate of 28%, when they should have been taxed at 10.5% or 17.5%.
Inland Revenue supplied default KiwiSaver funds with default member account details but not the member’s tax rate. Unless a fund successfully contacted members and obtained their tax rate, it had to deduct tax at 28%, the maximum rate.
‘‘This problem is likely to have affected the majority of those who have been enrolled in a default KiwiSaver fund. For six years ended 2018, this amounts to an estimated
$70 million of excess tax.
‘‘As this portfolio investment entity ([PIE] tax is a final tax, any overpayment is unrecoverable.’’
The real winners had been Australianowned banks, which had been able to invest the default funds in their own and each other’s securities, Mr Cliffe said.
As at March 2018, that amounted to 31% of the ASB’s default fund, 30% of ANZ’s, 31% of BNZ’s, 27% of Westpac’s and 34% of AMP’s.
If a balanced fund option for default funds was implemented, the exposure to Australianowned bank securities would decrease by about $1 billion.
The banks charged KiwiSaver members management fees for investing their funds in that way, he said.
The FMA, government ministers and others responsible for overseeing KiwiSaver had frequently asserted better financial literacy education of default investors was required, along with better fund manager performance in switching out default members.
‘‘After a decade of failure with this approach, it is time to take action.’’