Some KiwiSaver default members could end up being worse off than others. Photo / 123rf
Some KiwiSaver default members could end up being worse off than others. Photo / 123rf
Wide disparity of performance in new default KiwiSaver funds after just one year and fee variations have an expert worried some people will be thousands of dollars worse off in retirement purely through being randomly allocated to particular funds.
But Duncan Webb, the Government minister in charge of overseeing KiwiSaver,has defended its approach and says fund performance is best considered over long time horizons, especially given recent economic events.
In 2021 the Government appointed six default providers.
Two new providers are Simplicity and SuperLife/Smartshares.
Four existing providers are Westpac, Booster, BNZ and Kiwi Wealth (now owned by Fisher Funds). The Government changed the settings from conservative to balanced and the new funds must exclude fossil fuel investments.
The default funds are where new KiwiSaver members are allocated if they don’t choose their own fund and about 300,000 people are in these funds. In December 2021 the money and members were transferred from the 10 old default funds to the new funds, meaning they have now had a year of performance.
Matt Arnold, a director at Russell Investments said there was already a wide variation in the returns generated by the default funds since their inception.
The best-performing fund was Smartshares which was down 7.8 per cent while the Simplicity fund was down 12.6 per cent between December 1, 2021 and December 31, 2022. That meant a member who had an average balance of $9000 at the start of the year would be $432 worse off in the Simplicity fund versus the Smartshares fund.
Simplicity chief executive Sam Stubbs said its short-term underperformance was due to holding long-term investment grade bonds, which would be repaid in full, but lose their current value when interest rates rise.
Arnold said he was not critiquing the strategies of those particular funds, especially as the performance was only over one year. But he was concerned the different results of members was based purely on which fund Inland Revenue randomly allocated them to.
“That difference, the result of random allocation, is hard to defend.”
Arnold said he had the same concerns over the wide variation in fees default funds offered, with Westpac charging the highest fee on its default fund of 0.4 per cent and Smartshares the lowest at 0.2 per cent.
“Over decades such variations may result in some default members being thousands of dollars worse off than other members simply because they were randomly stuck in the “wrong” fund.
Arnold said the restriction on investing in fossil fuels had also been costly to default members in 2022.
“Many default members suffered weaker returns than non-default members in 2022 as sectors such as energy and utilities outperformed in 2022. Most would have been better off remaining in the conservative funds in which they were exited from in late 2021.”
He believed additional restrictions on default funds likely cost default members 60 basis points in returns compared to non-default members.
“The wide variation between the best and worst performing default managers, combined with the difference between the average conservative and balanced KiwiSavers, suggests that default member interests have not (yet) been well-served by the decisions made on their behalf.”
Arnold said a better approach would be for the default funds to have a defined asset mix and strategy and have the same fee, and be opened up to any provider which met the minimum credentials and could offer the fund at that fee.
“This would be fair to both default KiwiSaver members and to the local fund management community. And, most importantly, it would ensure default KiwiSaver member equity as individual returns would not be determined by the randomness that we see today – the outcomes for one default member would be virtually the same as the outcomes for all of the other default members.”
Alternatively, he says there could just be one default fund.
Minister of Commercer and Consumer Affairs Duncan Webb. Photo / Supplied
But the new Minister of Commerce and Consumer Affairs, Duncan Webb, said the Government ran a competitive process to ensure default members got the best value for money from their KiwiSaver for retirement.
“Providers who put forward the best proposals in terms of offering the best value for money for members were appointed.”
He said the transition of default providers and members was undertaken to align with the appointment of the new default providers.
“The Government did not consider it appropriate to attempt to time the transition based on markets given the inherent volatility of markets and inability to predict markets.”
Moving to a balanced investment strategy would lead to significant long-term benefits for members compared to the previous conservative approach, Webb added.
“KiwiSaver takes a long-term strategy to investing members’ savings for their benefit in retirement. While any financial investment has an element of risk, there are generally more gains over time from moving to a more growth-oriented fund compared to a conservative fund.”
He pointed to data from Sorted - the Government’s money education arm - showing balanced funds had an average return of 6.42 per cent compared to an average return of 4.65 per cent.
Webb said the Government also considered if default providers should meet responsible investment standards.
“...It was appropriate to change default provider investment settings to exclude fossil fuels on the basis of strong public support for requiring responsible investment approaches by default funds.”
He said the Government approved default providers but did not prescribe fees or investment decisions in order to retain competition and diversity in the market.
“A limited number of default providers strikes the best balance. Ultimately, the Government elected not to permit an ‘unlimited’ number of providers because of the risk this could decrease competitive pressure in the tender process as well as have greater costs for monitoring default providers and funds and a single fund would similarly lose the advantages of competitive pressure. "
How the new KiwiSaver default funds performed
Default fund Size of fund Return since inception (December 1, 2021 to December 31 2022):
