Opposition to ‘life stages’ default funds

Swapping KiwiSaver default funds for "life stages" settings wouldn't be in the best interests of investors or the scheme, oppponents say.

Friday, February 8th 2013, 10:45AM

by Niko Kloeten

Submissions to the government’s review of the default provider system have been mixed on the idea of adjusting default fund members’ asset allocation according to their age.

Supporters include default providers OnePath and Mercer, which said age-based defaults were common in the US and UK and recommended by the OECD as suitable strategies for pension plans.

Fisher Funds also supported this approach, saying that if the Government regards itself as a “de facto investment adviser” then it should act consistently with investment industry best practice.

“In other words, the level of short-term risk and volatility the Government should be willing to impose on default members needs to be in line with that of a best practice investment adviser.”

But default provider AMP opposed such a change because it would upset novice investors.

“Current default asset allocation requirements generally go against recommended portfolio construction for long-term investing,” it said.

“However, low levels of investor literacy often results in concern and erosion of confidence in the system when experiencing any short-term negative return. To maintain confidence, and therefore contribution levels, a more conservative default option should be continued.”

Authorised Financial Adviser Austin Fisher said adopting a life stages approach would be a step too far.

“My view is that the KiwiSaver providers who are keen to encourage members into growth funds should take the initiative to actively convince members. They do this by using their own resources and expertise to state a compelling case.

“This proposal seems to rely on a Government-sanctioned system to help do that work for them.”

The Trustee Corporations Association (TCA) said KiwiSaver default funds should continue with their conservative approach with a focus on preserving capital.

“It should not try to maximise the member’s returns or savings over the longer term.”

The TCA also said there would be a risk of public confidence in KiwiSaver being damaged if there was a change to the objectives of default funds.

The Retirement Policy and Research Centre said each default provider should be allowed to make its own decision about the default investment option with no official constraints.

“There seems no compelling reason for the government to set the default investment option, as it does now,” the RPRC said.

“In fact, it has no expertise on this topic yet, by becoming involved in this process, the state is representing itself as ‘knowing’ what is appropriate for a very large and disparate group of members.”

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

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