KiwiSaver is facing a big shake-up, as the tender opens soon for default status applications. Photo / Steven McNicholl
KiwiSaver is headed for its biggest shake-up in seven years as the Government gets ready to open the tender for those wanting to apply for default provider status in the next few weeks.
There are currently nine default providers, which were appointed in 2013, but since then the number of new providers has grown substantially, meaning the bidding is likely to be a lot more competitive.
KiwiSaver members are allocated to a default provider scheme when they are automatically enrolled through starting work or changing jobs and do not choose their own KiwiSaver fund.
Historical evidence show those who are auto-enrolled are very sticky - they tend not to move funds or providers - giving default providers a huge advantage when it comes gaining scale and earning fees.
About 690,000 New Zealanders are in default KiwiSaver funds. Only 290,000 actively chose to be in those funds. There are a total of 3.06 million people in KiwiSaver.
ASB runs the largest default scheme, with $4.1 billion of the total $10b invested in default provider schemes managed by the bank as of June 30, according to Morningstar data.
Booster is the smallest, with just over $102m in its default scheme.
Exactly how many providers will get the default status remains unknown at this point. Officials recommend it not be fewer than the current nine but also not be all providers as some have called for in the past.
Chris Douglas, a principal at MyFiduciary, which recently carried out research across the whole of the KiwiSaver sector, said he did not have a view on how many should get the default status but said the tender was a good opportunity to make sure those who got it were doing right by their members.
"I don't believe that anybody should just take it as a given that because they are a default provider today they will be a default provider going forward.
"I think when we have these reviews it is a great time to really make sure those members - many of which have been in these funds for a long period of time - we have got to make sure we provide them with the best investment proposition."
A default provider has never lost that status before. In the first appointment process, six providers were given default status but by the time the second review rolled around in 2013 the number of actual providers had shrunk to five due to a merger.
Those five - ASB, ANZ (ING), AMP, Fisher Funds Two (previously Tower) and Mercer - were reappointed. They were then joined by BNZ, Westpac, KiwiWealth and Booster.
If a provider loses the default status this time they will have to either convince their current members to switch to their other funds or the members will be transferred elsewhere and distributed among the new default providers.
Douglas said default status gave a provider a boost that went beyond just getting free members in the door.
"Default status certainly gives the public extra confidence by virtue of the fact they have been through a relatively robust framework and have been appointed.
"Having default status is another string in the bow of these providers. It also can help with marketing efforts outside of the default space as well."
Since 2014, the number of providers entering the KiwiSaver space has ramped up, with at least seven new entrants.
Sam Stubbs, chief executive of Simplicity which launched in late 2016, said it was still deciding whether it would enter the tender.
"It is likely we will, but we have concerns regarding the lack of information that has been provided in the past about the default members, specifically not getting an email address, which has made contacting them and providing financial education difficult. The RFP [Request for proposal] should provide clarity on that.
Stubbs said there were also issues regarding processing of hardship applications.
"We think [it] should be done by a central agency and funded by the industry.
"Neither of these are likely to be show stoppers for us, but we will need to see the RFP before making a final decision."
Stubbs isn't the only one waiting to see the RFP.
Rupert Carlyon, who launched the Koura KiwiSaver scheme last year, said: "We're still working our way through this and it will depend a little bit on what is asked for with the RFP."
But Carlyon is worried it could be hard for a new provider like Koura to get default status.
"In the Cabinet papers, MBIE [Ministry for Business Innovation and Employment] indicated they did not want many more default providers, and in my opinion taking customers away from the existing default providers will provide an incentive for MBIE not to take away default status of any of the existing status."
"In our view, our chances of success will depend as much on our own merits as to whether MBIE is willing to conduct a review on the performance of the existing providers, because otherwise it will largely remain as the status quo, with one or two additional large schemes added."
He wants the review to focus on how well existing default providers have done in moving members out of the default funds and into other funds, fees for the non-default funds and returns on the non-default funds.
"While we have not yet made a decision on what we will be doing, it would be good to get some more clarity from MBIE around number of providers and how they are going to assess the current providers before we spend a huge amount of time putting in a proposal."
An MBIE spokesman wouldn't be drawn on how many default providers would be selected or the exact details of the RFP.
"As part of our duty to ensure the probity of the procurement process, all applicants are entitled to receive the same information about the RFP at the same time.
"This means we're unable to provide the final details of the RFP ahead of its release."
But he pointed to Cabinet papers released earlier this year which indicated the review would focus on lower fees, transparency of fees and include responsible investment obligations.
That has already seen at least one provider tweak their fund. Earlier this month, Mercer announced it would cut fees on its default fund by 19 per cent and prioritise responsible investment strategies.
Mercer New Zealand consumer wealth leader Sarah Whitelock said its decision was based on member research and Government priorities for KiwiSaver default funds.
"Our member research has told us that KiwiSavers want better performance, competitive fees, easy to understand messaging and more RI [responsible investment].
"Ministers have made clear that their priorities for KiwiSaver default fund providers are to increase RI credentials, reduce fees and increase engagement with default members.
"We believe the changes to our KiwiSaver default fund will deliver best outcomes for members, while aligning with the ministers' priorities."
The MBIE spokesman said there wasn't a specific release date for the RFP yet as it was still working through the final stage of preparing the procurement process.
"However, the aim is to close the RFP before the Christmas/New Year period to allow sufficient time for the rest of the procurement process to run its course."
The new default providers will take over from November 30 next year, a date that was extended out from July 2021 because of Covid-19.
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