Ho­tel Ki­wiSaver: They can check out any time but they never leave

Taranaki Daily News - - Business - JANINE STARKS

An in­cred­i­ble 446,534 New Zealan­ders have fi­nan­cially ma­rooned their re­tire­ment. That’s an alarm­ing num­ber and you might be one of them with­out know­ing. How did it hap­pen?

They jumped aboard the Ki­wiSaver boat and fell asleep. Next minute they were washed up on one of nine sparse is­lands called ‘‘de­fault funds’’.

Trou­ble is, it wasn’t a bad place. Food and wa­ter drifted by and life could con­tinue. They went to work each day and a tour op­er­a­tor called a ‘‘fund man­ager’’ agreed to look af­ter them for a fairly low fee.

It was sup­posed to be a tem­po­rary hol­i­day, but hun­dreds of thou­sands of peo­ple for­got to make plans to move to lusher, more age-ap­pro­pri­ate is­lands. The nine is­lands got more and more crowded. The largest is called AMP and now con­tains 118,000 cast­aways. The isle of ASB has 92,000. Some live in smaller pop­u­la­tions of 17,000 on the isles of BNZ and West­pac. Many cast­aways just won’t com­mu­ni­cate with the out­side world and aren’t aware they’re harm­ing their longterm fu­ture.

The Coast­guard, oth­er­wise known as the Fi­nan­cial Mar­kets Author­ity (FMA) is storm­ing about like a grumpy par­ent, de­mand­ing each op­er­a­tor res­cue the cast­aways. Part of their orig­i­nal con­tract com­pelled them to en­gage in on­go­ing com­mu­ni­ca­tion and swim ed­u­ca­tion, in re­turn for the Gov­ern­ment fill­ing their de­fault camps with free cus­tomers.

Like any grumpy par­ent, the FMA is point­ing out a few an­noy­ing facts and choos­ing to ig­nore the so­cial con­text. Some Ki­wiSavers have been par­ty­ing too hard, is­land-hop­ping sev­eral times a year (this isn’t wise).

They’re at­tracted by the prospect of big­ger co­conuts in re­tire­ment, or they’ve seen the size of last year’s mo­ji­tos. The FMA as­sume that if fund man­agers can make these peo­ple swim so eas­ily, they can do it for the cast­aways too and should try harder.

But the is­sues are not the same. Com­pe­ti­tion must thrive and nor­mal Ki­wiSavers must be al­lowed to hop is­lands. Com­mu­ni­cat­ing with mo­ti­vated trav­ellers who want a great re­tire­ment is easy. Con­vinc­ing the bored cast­aways to ap­ply for their first pass­port is en­tirely dif­fer­ent.

Fund man­agers are scratch­ing their heads. In­di­vid­ual res­cues are costly and time-con­sum­ing. They drop leaflets with swim­ming lessons. They’re tin­ker­ing with font sizes and new headlines, which shout, ‘‘swim’’ loudly. Sto­ries are told about so­cial norms on the isles of ‘‘bal­anced fund’’ and ‘‘growth fund’’, where more than a million others re­side.

Fees of $31 million a year are raked in by fund man­agers run­ning the nine is­lands. Yet that’s only $70 a year per per­son, to pro­vide ser­vices as well as en­cour­age cast­aways to make an ac­tive choice to stay or go.

Di­rect mail and call cen­tres have huge costs and lim­ited ef­fec­tive­ness with the lethar­gic cast­aways.

So what are the big-wigs do­ing about this mass strand­ing? At the mo­ment they’re writ­ing tetchy letters to each other. The Min­is­ter of Com­merce and Con­sumer Af­fairs posted an an­nual let­ter to the boss at the FMA-Coast­guard and said the res­cue of these poor souls was to be a ‘‘strong fo­cus’’ in 2017/18.

The FMA in turn posted a let­ter to the fund man­ager run­ning each is­land, de­mand­ing they ‘‘do some­thing more ef­fec­tive’’.

The Coast­guard wield a lot of power, but aren’t ef­fec­tive in the cur­rent frame­work. They can re­quire a tour op­er­a­tor to take re­me­dial ac­tion un­der the con­tract. But there aren’t any quan­tifi­able per­for­mance tar­gets.

The Coast­guard can shut down an is­land, but that only di­rects new cast­aways to the other eight. They can re­place a tour op­er­a­tor with another, hop­ing they’ll do a bet­ter job. Fat chance, with­out a change to the frame­work and they know it. This is why their lat­est re­port says they’re not choos­ing to ex­er­cise their power yet.

So the sys­tem is a bit broke. We ei­ther bat­tle on with small in­cre­men­tal progress in a bro­ken sys­tem, or we im­ple­ment le­gal change to al­ter be­hav­iour and help those in de­fault funds make an ac­tive de­ci­sion about their fund choice. Five changes that would help im­mensely are:

1. Change the name of de­fault funds to tem­po­rary funds. Cur­rent lan­guage is mean­ing­less and doesn’t em­pha­sise their pur­pose.

2. For new Ki­wiSaver ac­counts, gov­ern­ment con­tri­bu­tions don’t be­gin un­til an in­vestor has ac­tively se­lected a fund. Money cre­ates com­pul­sion.

3. Al­low no more than two years in a de­fault fund, at which point man­agers can switch cus­tomers into a sim­i­lar con­ser­va­tive fund and drop the de­fault sta­tus.

4. Pre­scribe the num­ber of times a fund man­ager must write to and phone an in­vestor dur­ing the first two years. Given the cost of ac­quir­ing the cus­tomer is zero and the Ki­wiSaver mar­ket is wellde­vel­oped, fairly high ser­vice lev­els can be de­manded.

5. Pre­scribe that In­land Rev­enue will in­form em­ploy­ers of staff who have not made an ac­tive fund choice. Em­ploy­ers must alert em­ploy­ees quar­terly dur­ing the first two years. ❚ Janine Starks is a fi­nan­cial com­men­ta­tor with ex­per­tise in bank­ing, per­sonal fi­nance and funds man­age­ment. Opin­ions in this col­umn rep­re­sent her per­sonal views. They are gen­eral in na­ture and are not a rec­om­men­da­tion, opin­ion or guid­ance to any in­di­vid­u­als in re­la­tion to ac­quir­ing or dis­pos­ing of a fi­nan­cial prod­uct. Read­ers should not rely on these opin­ions and should al­ways seek spe­cific in­de­pen­dent fi­nan­cial ad­vice ap­pro­pri­ate to their own in­di­vid­ual cir­cum­stances.

Hun­dreds of thou­sands of peo­ple for­got to make plans to move to lusher, more age-ap­pro­pri­ate is­lands.

PHOTO: 123RF

De­fault Ki­wiSaver funds are like idyl­lic Pa­cific is­lands where there’s no temp­ta­tion to leave.

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