KiwiSaver default funds to stay conservative

First home buyers have withdrawn a total of $120.2 million from their KiwiSaver funds this year.

The government has settled on keeping the existing investment mandate for default KiwiSaver providers to manage funds conservatively, fending off attempts to implement a tiered approach based on members' age.

Finance Minister Bill English and Commerce Minister Craig Foss today announced the government's decision on the default provider review launched in November last year, keeping the conservative mandate which requires those fund to invest between 15 and 25 per cent in growth assets.

Fund managers had been pressing for a 'lifecycle' approach for default funds, which links the level of risk to an investor's age, claiming the conservative option meant members were missing out on about $72,000 each in foregone investment returns.

"The government believes it should take a risk-averse approach, as the default provider arrangement is making initial investment decisions on behalf of others," English said in a statement. "The aim of default funds is to provide stable returns and build confidence in KiwiSaver while members actively consider the best fund for their individual circumstances."

About 23 per cent of the 2.1 million KiwiSaver members are in default funds with an estimated $3.5 billion under management, according to a cabinet paper published today. The paper, signed off by English and Acting Commerce Minister Steven Joyce, said the conservative option would underpin confidence in the scheme with lower volatility on returns to better preserve capital.

The government will retender for the number of default providers with a view to appoint then in April next year. They will also require default providers to offer investment education and impartial financial advice as a means to improve members' engagement with their savings.

"This new requirement should reduce the percentage of fund members who are inappropriately in a conservative fund," the cabinet paper said.

Foss said that will work in conjunction with new disclosure requirements on KiwiSaver funds which will align the way the schemes report their investments and returns, to make it easier for members to "make an active choice."

The government doesn't expect to appoint more than 10 default fund providers, whose seven-year terms will begin from July next year.

The default funds will keep their current fee settings, which are typically about 0.5 per cent of a member's account balance plus a fixed administration fee, which the government considers has played "an important role in setting the benchmark in the market for fees that are not 'unreasonable'," the cabinet paper said.

In a November discussion document on the default providers, Ministry of Business, Innovation and Employment officials sought a better alignment between the interests of fund managers and investors, which they said had an "inherent misalignment" between investor interests to maximise returns over the long term and fund managers, who want to increase funds under management, typically by focusing on short-term gains.

The decision comes as retirement income was put back on the agenda by the Retirement Commissioner's draft report on superannuation last week recommending linking the age of eligibility to life expectancy, and a Financial Services Council conference calling for a sharp cut in tax on the investment schemes' returns.

In 2010, the government-appointed Savings Working Group's pressed for tax reform as a means to improve the nation's savings rate, and found people under the age of 45 don't have security for pension income because national superannuation can't survive in its current form.

KiwiSaver was set up in 2007 as a means to address the country's woeful savings rate, which has been undermined by an overinvestment in residential property. The country's household savings rate is projected to be negative for the next three years, according to the Reserve Bank.