Default Kiwisaver providers DPB dependency

Understanding the DPB
- the default provider benefit

* The best solution is to remove autoenrolment.

* If auto-enrolment is retained, all approved KiwiSaver providers should become default providers after 3 years.

One issue that limits KiwiSaver’s ability to achieve its full potential is the current role of the Default providers. While the concept solved the problem of what to do with employees who are enrolled without making a decision, it was a solution that came with significant costs in terms of achieving the best retirement savings outcomes. The problem is that it allocated “free” business and reduced the incentive for true competition, except at the margin. Also, their status is often misinterpreted as being the providers who are the “best” providers. They were, after all, chosen by the government.

Fees have been higher

The default providers on average have total costs higher than they need be. About $2,500 higher over the period to age 65 for a 35 year old employee earning $40,000 a year. This difference is about one month’s pay. Taking this as an average extra cost, with 420,000 people allocated to Default provider schemes, the additional cost of the government not focusing on competitive fees is over $1.1 billion.

Returns have been lower

For a member in KiwiSaver in the government-defined default option, the returns have been about 2% a year lower, on average, than SuperLife’s. With $1.7 billion estimated to be invested under the default option, this has probably cost $35 million a year in lost retirement savings for those New Zealanders allocated by the IRD to Default providers.

This transfer of wealth by the government and members to Default providers is a conservative estimate. As these providers have a stranglehold on the KiwiSaver market, their management cost inefficiencies extend to all their memberships.

This means overcharging could exceed $3.9 billion in fees for all KiwiSaver members over the terms of their average membership and a loss of over $114 million each year in uncompetitive investment returns.

Is it reasonable that the KiwiSaver industry should collect over $3.9 billion more than necessary in fees and credit $114 million p.a. less in investment performance? It must also be remembered that most of these overpayments add to the profits of offshore owned companies.

It is time to start a debate on:

• Getting rid of auto enrolment. This eliminates the need for Default provider status, or • Opening up the Default provider status to true competition. Why aren’t all KiwiSaver approved schemes not granted Default provider status. If an approved scheme doesn’t meet the standards, it should not be approved in the first place. As a minimum, an approved scheme should be given Default provider status after three years’ operation, unless it chooses not to accept it.

Either of these changes will not eliminate overcharging but it will force the industry to be more competitive; thus, pushing costs down and improving returns.

…

Full release: KiwiSaver__Default_providers.pdf

© Scoop Media