KiwiSaver default provider system slammed

A savings expert has called for a radical overhaul of the KiwiSaver default system, which would see the current default providers lose their "privileged" position in the market.

Thursday, April 5th 2012, 10:49AM

by Niko Kloeten

In the Retirement Policy Research Centre's latest PensionCommentary, co-director Michael Littlewood has questioned the need to renew the agreements with the six default KiwiSaver providers in 2014, when their current deals are up for renewal.

By then, most New Zealand employees will be KiwiSaver members and auto-enrolment will be unnecessary, he said.

However, "...if auto-enrolment continues to be a feature of KiwiSaver, there needs to be some kind of default provider regime. A default investment option is also needed because employees who are auto-enrolled will, by definition, have made no decision about how their savings are to be invested."

Littlewood said the Government "should not give a commercial and marketing advantage to a small group of financial service providers, especially if they do not pay for the privilege."

He has suggested two alternatives: the first and preferred option is to extend the Inland Revenus involvement with auto-enrolled members from the current eight weeks to a year.

If the member has not chosen a KiwiSaver provider by the end of 52 weeks, the member will automatically begin a contributions holiday. The membership will stay in the Inland Revenue's ‘holding' scheme until the member chooses a provider.

Alternatively, he said the government should prescribe a set of minimum standards for default providers (there are none at present). Any KiwiSaver scheme that continuously complied with those standards would automatically be on the Inland Revenue's default provider list.

Littlewood said the initial default provider appointment process in 2006 was "flawed" and there has been no follow-up, or research, to see whether the performance of default providers as a group has justified the "commercial favour" conferred on them.

He also opposed the Savings Working Group's proposal that would have seen the government become a commercial competitor to private providers.

"Aside from size, and the absence of a profit motive, the government has no competitive advantage in delivering superannuation services. On those grounds, the government could justify involvement in any business activity."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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