KiwiSaver default funds creating lazy investors, costing billions
Over 430,000 Kiwisavers, or just over 15% of KiwiSavers, continue to be invested in default KiwiSaver funds. This comes
at an enormous cost to them. A recent study estimated that close to a billion dollars, and growing, is what default
members have collectively foregone as a result of continuing to stay in default funds.
Binu Paul, co-founder of price comparison site, PocketWise (www.pocketwise.co.nz) says “The very fact that a new member
can fall back on a ‘default’ position means that there is no incentive for the member to put the effort into making a
considered choice at the time of signing up. This ‘easy way out’ creates lazy investors of KiwiSavers.”
With the review of the default KiwiSaver funds coming up in 2019, it is timely to reconsider why have a default
KiwiSaver mechanism at all.
It’s easy enough to blame this on people’s apathy or to blame the default provider for not doing ‘enough’ to educate and
encourage their members into a more considered choice of fund. But, perhaps the solution lies in the very structure of
how KiwiSaver is organised to operate.
The concept of default funds was etched into the KiwiSaver regime when it launched in 2007, as a temporary parking space
to enable investors enough time to make a considered choice of fund. The aim of default schemes is to provide stable
returns for KiwiSaver members and build confidence in KiwiSaver. Default schemes have a conservative investment
approach, meaning, typically lower but more stable returns over time.
As noble as that sentiment is, it may now be working against the interest of KiwiSavers. According to Paul, “It should
be easier to force members to make appropriate decisions early on rather than leave it for later. It will be a harder
sell down the line, especially with no instant gratification. ‘I’ll take a look at it later on’ hasn’t clearly worked
for close to half a million Kiwis”.
Additionally, the concept of default schemes creates other anomalies.
In total there are about 20 retail KiwiSaver schemes of which only 9 have been designated ‘default’, at the 2014 review.
Default schemes are chosen by a panel of evaluators assessing proposals submitted by providers and carrying out due
diligence. The tenders are evaluated according to technical criteria (70 per cent) such as organisational capability,
member education and investment capability; and 30 per cent of the evaluation on the providers’ pricing levels.
So what does that mean for the non-default providers? Should KiwiSavers feel less confident of them, assuming they had
applied and didn’t make the cut?
Paul says, “Perhaps a more effective solution would be to require all providers to satisfy all requirements and if they
are fit for purpose, to have at least one fund in their Scheme as a ‘default’ fund - rather than approving only some
providers to offer default Schemes”.
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