Inside Money: Passive Design - a weird budget default option

If there is a demand for such investment vehicles why not leave it up to the NZX, or other appropriate entity, to create and market them like real financial businesses do? Photo / Richard Robinson

One of the oddest recommendations in Bill English's "weird budget" (as my mother described it) was buried here and has passed on with little comment.

"The Government will consider facilitating creation of broadly diversified, listed passive debt and equity vehicles," the budget note says. "These would offer easy, one-stop access to the local capital markets."

Eh? Mum was right, something weird's going on.

Strange because there are already a number of passive equity funds listed on, and owned by, the NZX and marketed under the Smartshares brand.

Admittedly, there are no equivalent passive debt funds but if there is a demand for such investment vehicles why not leave it up to the NZX, or other appropriate entity, to create and market them like real financial businesses do?

What's a no-nanny state National Government doing volunteering its surrogate services to conceive another unwanted financial product?
I sought clarification from the government:

"The Government is keen to see more retail-friendly market offerings on the NZX," a spokesman from the office of Bill English replied. "The Government's focus would be on regulatory changes that would enable the establishment of passive debt funds and would make it simpler and less expensive to set up and administer passive equity funds."

Who's driving this agenda? The Office of Bill English didn't answer my question but the main suspect is well-known to investors.

The Budget papers, however, say the idea "was raised by the Savings Working Group", which is only slightly true.

What the Savings Working Group (SWG) did propose, and the only time it mentioned passive investment vehicles, was the creation of a single, government-run KiwiSaver default scheme.

You can find the quote in full on page 101 of the SWG report but here's an excerpt:

"[The SWG] Recommends rationalising the default scheme so it invests only in index-based shares and bonds and offers a limited number of basic combinations for such investments. Members are then able to select one mix or default to an age-related transition programme through the different mixes."

Industry insiders are speculating the budget passive initiative is really the first phase of this plan to implement the single KiwiSaver default system.

Stranger things have happened.