KiwiSaver changes make sense

Changes to the KiwiSaver scheme announced recently have received a mixed reaction.

At the end of January this year, the savings scheme had more than three million members, about 1.3million of whom were automatically enrolled by employers.

Automatic enrollees allocated a conservative default fund often stay in them for years, even when that is unlikely to be the best option for their money, particularly if they have a long time to go before reaching the age of 65 when they will be able to withdraw funds.

About 690,000 people have stayed in default KiwiSaver funds. Although in recent years scheme providers have been encouraged to inform members about whether they are in the best fund to suit their needs, about 400,000 of the 690,000 have not made an active choice to stay with default funds.

Changes to the default settings are being designed to coincide with the end of the terms for the existing nine default providers in June next year.

As new providers are appointed, the default fund settings will be changed from conservative to balanced.

Balanced funds have greater diversity than conservative funds, containing a mix of shares and property, bank deposits, cash, bonds and other fixed-interest investments. Investors need to be comfortable with some fluctuation in their balance, more than would be expected in a conservative fund.

People who actively choose to stay in a conservative fund, possibly because they are nearly 65, will not be forced into a balanced option.

This move makes sense, particularly for those who are lacking in financial literacy or simply apathetic about the performance of their KiwiSaver account.

Rule changes to prevent default providers from investing in fossil fuel production seem less straightforward.

In recent years, default fund providers have divested investments in illegal weapons such as cluster munitions and anti-personnel landmines and the new rules will enshrine that in default fund settings.

The fossil fuel proposal has been hailed by some as being good for climate stability as well as benefiting KiwiSaver members financially, but others have questioned such claims.

There is also the difficulty of deciding what should be excluded. Will it just be oil companies, or will it extend to such organisations as banks which deliver loans to Australian mining companies?

At this stage the Government has not provided detail on this, saying it will do so as part of the tender process to appoint the new default providers. That is due to start at the end of this year.

There have also been questions about why fossil fuels have been singled out instead of a wider ethical investment approach which could include such things as tobacco, alcohol, gambling, animal testing, and human rights and environmental violations. But there is also the question of whether it is the Government’s job to make ethical judgements for KiwiSaver members when they have the option of doing that by choosing a fund which fits their ethos.

There is a school of thought which says if you want to effect real change, rather than just support those already doing the right thing, you invest in those acting unethically and use your power for good as a shareholder.

Default providers will be required to maintain a responsible investment policy that is published on their websites, but again, there is no detail about what this might involve.

Default providers will also be required to engage with their members to help them make informed decisions about their retirement savings.

We await the details around all of these proposals with interest, no pun intended, and hope that the process will allow KiwiSaver members to become better informed and confident about what is the best option for their money.