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They are big news in the industry, but to understand these terms and their importance, it requires a quick history lesson.
In the mid-2000s, when the concept of introducing a new superannuation scheme was first mooted, the discussion focused on how to ensure it was successful.
For many people this would be their first experience of being a diversified investor. The process by which prospective investors would select a fund manager and then a suitable asset allocation was seen as being critical to the scheme’s success.
When the scheme was introduced in 2007 as KiwiSaver, the Government of the day set up a system where, if new investors enrolled in it without nominating a specific manager, they were randomly placed into one of a number of default funds which were provided by a government approved manager, known as a default provider.
As a second level of "protection", to reduce the chance of new investors experiencing initial losses, all default funds were mandated to have a very conservative asset allocation with a minimum of 75% of the assets held in cash and fixed interest.
As it turned out, the Global Financial Crisis was "just around the corner", so the mandated conservatism of the default funds protected investors from the worst of the market volatility.
The size of any losses was also modest as account balances were relatively small at that time.
If we roll forward 14 years to today, we are now in a different world. The total funds held in KiwiSaver accounts are now almost $80 billion.
As at March 31, 2021 almost $68 billion of this total was managed by one of the nine current default providers.
This is not to say that all of this capital is held in their respective default funds, but it does highlight that being a default provider has been important in allowing some managers to build significant market share.
The periodic review of default providers and the specific parameters under which they must operate is required by legislation.
The changes that will result from the most recent review are more wide-ranging than those of the past and cover four different areas.
First off, the total number of default providers has been reduced from nine to six. Five of the existing providers (AMP, ANZ, ASB, Fisher Funds and Mercer) have lost their default status. Two new providers have been appointed; Simplicity and Smartshares(NZX).
This now means that from December the six default providers will be; BNZ, Booster, BT Funds (Westpac), KiwiWealth, Simplicity and Smartshares (NZX).
The second change is perhaps more significant. The requirement to be conservative and hold a maximum of 25% of the investments in shares and property has changed.
From December, default funds must follow a more "balanced" asset allocation where the upper limit of shares and property they hold will rise from 25% to as much as 63%.
This increases the prospect of greater returns in the long run but also increases the level of volatility that investors will experience.
The next change relates to the fees that can be charged in a default fund. They will now fall within the 0.20% to 0.40% range. For the incumbents this has required them to reduce their fees by up to 30%.
The final change relates to a new requirement to have a responsible investment policy and specifically exclude fossil fuel production and illegal weapons.
So what does this all mean? It will take another column to discuss the wider implications of these changes.
However, the immediate question is what do the current investors (estimated to be around 380,000 people) in default funds need to do or consider?
If you are in a default fund, then you need to do some serious thinking.
1. If your current manager will lose their default status from December, then you can choose to do nothing. In that case, you will be reallocated to one of the new default funds, with a new manager and a more share focused asset allocation.
2 .If your current manager has retained their default status, then you will automatically be transferred to the new version of their default fund (with a changed asset allocation) from December.
The change to default funds using a "balanced" allocation is likely to be "less wrong" than the current "conservative" allocation for most in default funds, but it won’t stop it from being completely wrong for many.
Clearly, a one-size-fits-all approach is always going to be found wanting. In next month’s column I will examine the implications in more detail.
If you are impacted by these changes, then I recommend that you seek advice. For many New Zealanders, their KiwiSaver will ultimately become their largest financial asset and is worthy of careful consideration.
- Peter Ashworth is a principal of New Zealand Funds Management Ltd, and is a Dunedin-based financial adviser. The opinions expressed in this column are his own and not necessarily that of his employer. His disclosure statements are available on request and free of charge.